CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

CBO

Selected 

CBO Publications 

Related to

 Health Care 

Legislation, 

2009–2010

DECEMBER 2010
Pub. No. 4228
The Congress of the United States O Congressional Budget Office

Selected CBO Publications Related to 

Health Care Legislation, 2009–2010

December 2010
CBO
CBO

Preface

In March 2010, the Congress passed and the President signed into law legislation that 

makes major changes to the U.S. health care and health insurance systems. That legislation 

came in two parts: the Patient Protection and Affordable Care Act and the Health Care and 

Education Reconciliation Act of 2010. Among other things, those laws will establish a mandate for most legal residents of the United States to obtain health insurance; create insurance 

exchanges through which certain individuals and families will receive federal subsidies; significantly expand eligibility for Medicaid; reduce the growth of Medicare’s payment rates for 

most services; impose an excise tax on insurance plans with relatively high premiums; impose 

certain taxes on individuals and families with relatively high incomes; and make various other 

changes to the federal tax code, Medicare, Medicaid, and other programs. (In addition, the 

Reconciliation Act substantially alters federal programs governing loans and grants for postsecondary education.)

In the course of the deliberations over health care legislation, the Congressional Budget 

Office (CBO) provided a wide variety of estimates and other analyses regarding the impact of 

proposals on the federal budget and on aspects of health care and health insurance that were 

of interest to policymakers. In many cases, those estimates and analyses were produced in collaboration with the staff of the Joint Committee on Taxation (JCT). That process began in 

early 2009 and continued past the enactment of the legislation in March of this year.

Responding to many requests, this report compiles a set of those estimates and analyses for 

easy reference. The report begins with the cost estimate for the final legislation and several 

analyses related to that legislation. It also includes several cost estimates and analyses of earlier 

versions of that legislation and alternative proposals that were considered in the House and 

Senate before final passage. In addition, this report brings together analyses that CBO issued 

during this period concerning insurance premiums and premium subsidies, the budgetary 

accounting of proposals, changes to the medical malpractice system, and certain related topics 

that arose during the Congressional debate. A number of related cost estimates and publications are not included in this volume but are available on CBO’s Web site. In keeping 

with CBO’s mandate to provide objective, nonpartisan analysis, this report makes no 

recommendations. 
CBO

PREFACE

During the past two years, CBO’s health team worked tirelessly to provide the 

Congress with information about numerous alternative proposals to change the 

nation’s health care and health insurance systems. Representing one of the most 

challenging and significant analytical efforts that CBO has ever undertaken, this process involved dozens of CBO analysts, required modeling of thousands of complex 

and often interacting provisions, and included countless communications with staff 

members of many Congressional committees and offices. Significant contributions 

to this effort were made by the following people: David Auerbach, Colin Baker, 

Reagan Baughman, James Baumgardner, Patrick Bernhardt, Tom Bradley, 

Stephanie Cameron, Julia Christensen, Mindy Cohen, Anna Cook, Marion Curry, 

Sheila Dacey, Sandy Davis, Sunita D’Monte, Noelia Duchovny, Sean Dunbar, 

Philip Ellis, Peter Fontaine, Carol Frost, April Grady, Mark Hadley, Stuart Hagen, 

Holly Harvey, Tamara Hayford, Jean Hearne, Janet Holtzblatt, Lori Housman, 

Paul Jacobs, Daniel Kao, Julie Lee, Kate Massey, T.J. McGrath, Jamease Miles, 

Alexandra Minicozzi, Keisuke Nakagawa, Kirstin Nelson, Lyle Nelson, Andrea Noda, 

Sam Papenfuss, Matthew Pickford, Lisa Ramirez-Branum, Lara Robillard, 

Matt Schmit, John Skeen, Robert Stewart, Robert Sunshine, Bruce Vavrichek, 

Ellen Werble, Chapin White, Rebecca Yip, and Darren Young. CBO’s health team is 

deeply indebted to our colleagues at JCT—especially Thomas Barthold, James Cilke, 

Tim Dowd, Pamela Moomau, and Bernard Schmitt—for their many contributions 

and insights. 

Maureen Costantino prepared the report for publication, with assistance from Jeanine 

Rees, and designed the cover. Annette Kalicki prepared the electronic version for 

CBO’s Web site (www.cbo.gov). 

Douglas W. Elmendorf

Director

December 2010
Contents

I. Enacted Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

1. Final Cost Estimate, March 20, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2. Estimated Revenue Effects (Table released by the staff of the Joint Committee on 

Taxation), March 20, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

3. Responses to Questions About CBO’s Preliminary Cost Estimate, March 19, 2010 . . . . 42

4. Potential Effects on Discretionary Spending, May 11, 2010 . . . . . . . . . . . . . . . . . . . . . . 47

5. Further Information About Potential Effects on Discretionary Spending, 

May 12, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

6. Effects on Prices of Prescription Drugs, November 4, 2010 . . . . . . . . . . . . . . . . . . . . . . 58

7. Impact on Enrollment and Additional Benefits in the Medicare Advantage Program, 

March 19, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

8. Effects on Payments to Different Types of Health Care Providers, March 19, 2010 . . . . 69

9. Impact on Premiums for Part D of Medicare, March 19, 2010. . . . . . . . . . . . . . . . . . . . 70

10. Amount and Distribution of Individual Mandate Penalties, April 30, 2010 . . . . . . . . . . 71

II. Earlier Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75

1. Effects of Specifications in the America’s Affordable Health Choices Act 

Pertaining to Health Insurance Coverage, July 26, 2009 (Analysis of legislation 

considered by the House Committee on Ways and Means). . . . . . . . . . . . . . . . . . . . . . . 77

2. Potential Effects of the Affordable Health Choices Act, September 10, 2009 

(Analysis of legislation considered by the Senate Committee on Health, 

Education, Labor, and Pensions). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95

3. Preliminary Analysis of H.R. 3962, the Affordable Health Care for America Act, 

October 29, 2009 (Analysis of legislation sponsored by Representative 

John D. Dingell and considered by the House of Representatives) . . . . . . . . . . . . . . . . 102

4. Preliminary Analysis of an Amendment in the Nature of a Substitute for 

H.R. 3962, the Affordable Health Care for America Act, November 4, 2009 

(Analysis of legislation sponsored by House Republican Leader John A. Boehner 

and considered by the House of Representatives) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

5. Impact of Increasing Medicare’s Payments to Physicians and Enacting H.R. 3962, 

November 19, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

6. Cost Estimate for the Patient Protection and Affordable Care Act, Incorporating 

the Manager’s Amendment, December 19, 2009 (Analysis of legislation considered 

by the Senate) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

7. Correction Regarding the Longer-Term Effects of the Manager’s Amendment 

to the Patient Protection and Affordable Care Act, December 20, 2009 . . . . . . . . . . . . 188
CONTENTS

III. Premiums and Subsidies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .191

1. Analysis of Health Insurance Premiums Under the Patient Protection and 

Affordable Care Act, November 30, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .193

2. Estimated Average Premiums Under Current Law, December 5, 2009 . . . . . . . . . . . . .222

3. Estimated Premiums for Bronze Coverage Under the Patient Protection and 

Affordable Care Act, January 11, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .223

4. Exchange Subsidies and Enrollee Payments in 2016 Under the Senate Finance 

Committee Chairman’s Mark as Amended, October 9, 2009 . . . . . . . . . . . . . . . . . . . .226

5. Subsidies to and Payments by Enrollees in Insurance Exchanges Under the 

Affordable Health Care for America Act, November 2, 2009. . . . . . . . . . . . . . . . . . . . .227

6. Subsidies and Payments at Different Income Levels Under the Patient 

Protection and Affordable Care Act, November 20, 2009 . . . . . . . . . . . . . . . . . . . . . . .231

IV. Federal Budgetary Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .235

1. Budgetary Treatment of Proposals to Change the Nation’s Health Insurance 

System, May 27, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .237

2. Different Measures for Analyzing Current Proposals to Reform Health Care, 

October 30, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .244

3. Budgetary Treatment of Proposals to Regulate Medical Loss Ratios, 

December 13, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .253

4. Effect of the Patient Protection and Affordable Care Act on the Hospital Insurance 

Trust Fund, January 22, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .255

V. Medical Malpractice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .259

1. Effects of Proposals to Limit Costs Related to Medical Malpractice (Tort reform), 

October 9, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .261

2. Additional Information on the Effects of Tort Reform, December 10, 2009 . . . . . . . . .268

3. Responses to Questions on the Effects of Tort Reform, December 29, 2009 . . . . . . . . .275

VI. Other Issues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .283

1. Expanding Health Insurance Coverage and Controlling Costs for Health Care, 

February 10, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .285

2. Health Care Reform and the Federal Budget, June 16, 2009 . . . . . . . . . . . . . . . . . . . . .317

3. Effects of Changes to the Health Insurance System on Labor Markets, 

July 13, 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .335

4. Budgetary Effects of Expanding Governmental Support for Preventive Care and 

Wellness Services, August 7, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .343

5. Budgetary Effects of Proposals to Establish a Community Living Assistance 

Services and Supports (CLASS) Program, November 25, 2009 . . . . . . . . . . . . . . . . . . .350
CBO

Enacted Legislation

In March 2010, the Congress passed and the President signed into law two pieces of legislation—the Patient Protection and Affordable Care Act (PPACA, Public Law 111-148) and the 

Health Care and Education Reconciliation Act of 2010 (P.L. 111-152)—that make major 

changes regarding the provision of health insurance, subsidies for insurance coverage, payments for health care through federal programs, and tax revenues. The Congressional Budget 

Office (CBO) and the staff of the Joint Committee on Taxation (JCT) provided a cost estimate for that legislation as well as several related analyses. The following items are included 

here: 

1. CBO’s final cost estimate for the health care legislation that was later enacted. That estimate, which was released on March 20, 2010, shows both the effects of the two acts combined and the incremental effects of the reconciliation legislation. (Related analyses not 

included in this volume are a preliminary cost estimate for the two acts, which was substantially similar to the final estimate and was released on March 18, 2010, and an estimate of the effects of enacting PPACA by itself, which was released on March 11, 2010.) 

2. JCT’s table providing detailed estimates of the effects on revenues of the provisions of the 

two acts that changed the federal tax code, which was released on March 20, 2010. 

3. Answers to several questions about CBO’s preliminary cost estimate for the two acts and 

the impact of modifying several provisions of the legislation, which were provided in a letter to Representative Paul Ryan dated March 19, 2010. 

4. Additional information about the potential effects of PPACA on discretionary spending—

that is, spending subject to future appropriation action—provided in a letter to Representative Jerry Lewis dated May 11, 2010. The legislation authorized federal agencies to 

establish new programs and conduct new activities, but in many cases it did not appropriate funds to implement those initiatives. Thus, future legislation would be required for the 

funds to be appropriated and spent. This letter provides more detail on those costs than 

was included in the cost estimate for the legislation. 

5. A further clarification about the potential effects of PPACA on discretionary spending, 

which was provided on May 12, 2010. 

6. An analysis of the legislation’s impact on prices for prescription drugs, which was provided 

in a letter to Representative Paul Ryan dated November 4, 2010. 
ENACTED LEGISLATION

Around the time the legislation was being considered in the Congress or soon thereafter, CBO 

also released several shorter and less formal write-ups providing supplementary information 

about certain aspects of the legislation’s estimated effects, consisting of the following: 

7. Estimates of projected enrollment in Medicare Advantage plans (private insurance plans 

that provide Medicare’s required benefits) and the subsidies for extra benefits provided by 

those plans (dated March 19, 2010). 

8. A table showing how certain provisions of the legislation would change Medicare’s payments to different types of health care providers (dated March 19, 2010). 

9. Projected premiums for the Medicare drug benefit (known as Part D) under the two acts, 

with a comparison to the premiums that would have resulted from PPACA alone (dated 

March 19, 2010). 

10. An analysis of estimated penalty payments that would be made for being uninsured and 

the people, by income category, who would pay those penalties in 2016 (dated April 30, 

2010). 

In addition to the publications listed above, CBO has discussed the budgetary implications of 

the enacted legislation in two reports. The June 2010 report The Long-Term Budget Outlook 

describes how the legislation affected CBO’s projections of federal spending on health care 

over the long term (see, in particular, Chapter 2). The August 2010 report The Budget and 

Economic Outlook: An Update discusses how the effects of the legislation were incorporated 

into CBO’s budgetary baseline for the 2011–2020 period (see Box 1-1). 
CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director 

U.S. Congress 

Washington, DC 20515 

March 20, 2010 

Honorable Nancy Pelosi 

Speaker 

U.S. House of Representatives 

Washington, DC 20515 

Dear Madam Speaker: 

The Congressional Budget Office (CBO) and the staff of the Joint 

Committee on Taxation (JCT) have completed an estimate of the direct 

spending and revenue effects of an amendment in the nature of a substitute 

to H.R. 4872, the Reconciliation Act of 2010. The amendment discussed in 

this letter (hereafter called “the reconciliation proposal”) is the one that was 

made public on March 18, 2010, as modified by subsequent changes 

incorporated in a proposed manager’s amendment that was made public on 

March 20. 

This estimate differs from the preliminary estimate that CBO issued on 

March 18 in that it reflects CBO and JCT’s review of the legislative 

language of the earlier amendment and the manager’s amendment, as well 

as modest technical refinements of the budgetary projections.1

 This 

estimate is presented in two ways: 

 An estimate of the budgetary effects of the reconciliation proposal, 

in combination with the effects of H.R. 3590, the Patient Protection 

and Affordable Care Act (PPACA), as passed by the Senate; and 

 An estimate of the incremental effects of the reconciliation proposal, 

over and above the effects of enacting H.R. 3590 by itself.2

 

1

 For the preliminary estimate by CBO and JCT of the direct spending and revenue effects of the 

reconciliation proposal, see Congressional Budget Office, letter to the Honorable Nancy Pelosi 

providing a preliminary analysis of the reconciliation proposal (March 18, 2010). 

2

 For the estimate by CBO and JCT of the direct spending and revenue effects of H.R. 3590 as 

passed by the Senate, see Congressional Budget Office, cost estimate of H.R. 3590, Patient 

Protection and Affordable Care Act (March 11, 2010). JCT’s detailed table of revenue effects is 

available at www.jct.gov. 
Honorable Nancy Pelosi 

Page 2 

CBO and JCT have not yet updated their preliminary and partial estimate of 

the budgetary impact of the reconciliation proposal under the assumption 

that H.R. 3590 is not enacted—that is, the reconciliation proposal’s impact 

under current law. 

H.R. 3590 would, among other things, establish a mandate for most 

residents of the United States to obtain health insurance; set up insurance 

exchanges through which certain individuals and families could receive 

federal subsidies to substantially reduce the cost of purchasing that 

coverage; significantly expand eligibility for Medicaid; substantially reduce 

the growth of Medicare’s payment rates for most services (relative to the 

growth rates projected under current law); impose an excise tax on 

insurance plans with relatively high premiums; and make various other 

changes to the federal tax code, Medicare, Medicaid, and other programs. 

The reconciliation proposal includes provisions related to health care and 

revenues, many of which would amend H.R. 3590. (The changes with the 

largest budgetary effects are described below.) The reconciliation proposal 

also includes amendments to the Higher Education Act of 1965, which 

authorizes most federal programs involving postsecondary education. 

(Those provisions and their budgetary effects are described below as well.) 

Estimated Budgetary Impact of the Legislation 

CBO and JCT estimate that enacting both pieces of legislation—H.R. 3590 

and the reconciliation proposal—would produce a net reduction in federal 

deficits of $143 billion over the 2010–2019 period as result of changes in 

direct spending and revenues (see Table 1). That figure comprises 

$124 billion in net reductions deriving from the health care and revenue 

provisions and $19 billion in net reductions deriving from the education 

provisions. Approximately $114 billion of the total reduction would be onbudget; other effects related to Social Security revenues and spending as 

well as spending by the U.S. Postal Service are classified as off-budget. 

CBO has not completed an estimate of the potential impact of the 

legislation on discretionary spending, which would be subject to future 

appropriation action. 

CBO and JCT previously estimated that enacting H.R. 3590 by itself would 

yield a net reduction in federal deficits of $118 billion over the 2010–2019 

period, of which about $65 billion would be on-budget. The incremental 

effect of enacting the reconciliation proposal—assuming that H.R. 3590 

had already been enacted—would be the difference between the estimate of 

their combined effect and the previous estimate for H.R. 3590. That 
Honorable Nancy Pelosi 

Page 3 

incremental effect is an estimated net reduction in federal deficits of 

$25 billion during the 2010–2019 period over and above the savings from 

enacting H.R. 3590 by itself; almost all of that reduction would be onbudget.3

Additional details on the budgetary effects of the reconciliation proposal 

and H.R. 3590 are provided in Tables 2 through 7 attached to this letter: 

 Table 2 shows budgetary cash flows for direct spending and 

revenues associated with the two pieces of legislation combined. 

 Table 3 summarizes the incremental changes in direct spending and 

revenues resulting from the reconciliation proposal, assuming that 

H.R. 3590 had already been enacted. 

 For the two pieces of legislation combined, Table 4 provides 

estimates of the changes in the number of nonelderly people in the 

United States who would have health insurance and presents the 

primary budgetary effects of the provisions related to health 

insurance coverage. 

 For the two pieces of legislation combined, Table 5 displays detailed 

estimates of the costs or savings from the health care provisions that 

are not related to health insurance coverage (primarily involving the 

Medicare program). The table does not include the effects of revenue 

provisions; those effects are reported separately by JCT in 

JCX-17-10 at www.jct.gov. 

 Table 6 presents details on the incremental effects of the health care 

and revenue provisions of the reconciliation proposal—that is, the 

difference between the effects of those provisions in the two pieces 

of legislation combined and the effects of H.R. 3590 by itself (as 

shown in CBO’s cost estimate of March 11, 2010). 

 Table 7 summarizes the incremental effects of the health care, 

revenue, and education provisions of the reconciliation proposal, 

also assuming that H.R. 3590 had been enacted. 

 

3

 As originally introduced, the reconciliation proposal would require transfers from on-budget 

general funds to the off-budget Social Security trust funds to offset any reduction in the balances 

of those trust funds resulting from other provisions of the proposal. The effects of that provision 

were reflected in CBO’s preliminary estimate. However, the manager’s amendment to the 

reconciliation proposal strikes that provision, so its effects are not included in this estimate. 
Honorable Nancy Pelosi 

Page 4 

The estimate provided here covers the 2010–2019 period to be consistent 

with the budget horizon used under S. Con. Res. 13, the Concurrent 

Resolution on the Budget for Fiscal Year 2010. The Congress has not yet 

adopted a new budget resolution that would extend the House and Senate 

budget enforcement periods through 2020. 

Because the reconciliation proposal and H.R. 3590 would affect direct 

spending and revenues, pay-as-you-go procedures would apply. The time 

periods used for pay-as-you-go calculations under the new Statutory PayAs-You-Go Act extend from 2010 through 2015 and from 2010 through 

2020. Although CBO and JCT have not conducted a detailed analysis of the 

effects of the reconciliation proposal and H.R. 3590 in 2020, enacting that 

legislation would probably reduce the budget deficit modestly in that year. 

Reflecting that assessment, CBO and JCT estimate that enacting that 

legislation would reduce projected on-budget deficits both through 2015 

and through 2020.4

The remainder of this letter discusses the major components of the 

education provisions contained in the reconciliation proposal; reviews the 

main changes that the reconciliation proposal would make to the health care 

and revenue provisions of H.R. 3590; describes the effects of the legislation 

on health insurance coverage; presents information about the effects of the 

legislation on discretionary spending; provides CBO’s analysis of the 

legislation’s impact on the federal budget beyond the first 10 years; and 

analyzes certain other effects of the legislation. 

 

4

 Pay-as-you-go procedures do not apply to off-budget effects, which include changes to Social 

Security or the U.S. Postal Service. Under the Statutory Pay-As-You-Go Act, estimated changes in 

the on-budget deficit from direct spending and revenues are recorded on 5-year and 10-year 

“scorecards” by the Office of Management and Budget, which is required to order a sequestration 

(cancellation) of certain direct spending if either scorecard reflects a net cost in the budget year at 

the end of a Congressional session. 
Honorable Nancy Pelosi 

Page 5 

Table 1. Estimate of the Effects on the Deficit of the Reconciliation Proposal Combined 

with H.R. 3590, as Passed by the Senate 

 By Fiscal Year, in Billions of Dollars 

 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

 

NET CHANGES IN THE DEFICIT FROM INSURANCE COVERAGE PROVISIONS a,b

 

Effects on the Deficit 3 7 9 10 49 87 132 154 164 172 78 788

 

NET CHANGES IN THE DEFICIT FROM OTHER PROVISIONS AFFECTING DIRECT SPENDING c

 

Effects on the Deficit of 

Changes in Outlays 3 3 -7 -28 -50 -60 -70 -86 -101 -116 -79 -511

 

NET CHANGES IN THE DEFICIT FROM OTHER PROVISIONS AFFECTING REVENUES d

 

Effects on the Deficit of 

Changes in Revenues * -9 -12 -38 -50 -48 -59 -65 -69 -71 -109 -420

NET CHANGES IN THE DEFICIT a

Net Increase or Decrease (-) 

in the Budget Deficit 6 1 -10 -56 -51 -20 3 4 -5 -15 -109 -143

 On-Budget 6 1 -10 -55 -50 -18 8 10 2 -6 -108 -114

 Off-Budget e

 * * 1 -1 -1 -2 -5 -6 -7 -9 -1 -29

 

Memorandum: 

 

Incremental Effects on the Deficit of H.R. 4872 Incorporating the Manager’s Amendment, 

Relative to H.R. 3590 as Passed by the Senate 

Net Increase or Decrease 2 4 4 -3 -13 -4 -7 -3 -2 -3 -5 -25

 On-Budget 2 4 4 -6 -14 -7 -11 -7 -6 -7 -10 -48

 Off-Budget e

 0 * * 4 1 3 4 4 4 4 5 23

 

Effects on the Deficit of Provisions of the Reconciliation Proposal Combined with H.R. 3590 

 Health Care and Revenue 

 Provisions 6 1 -13 -50 -48 -16 7 6 -4 -13 -104 -124

 Education Provisions * * 4 -6 -3 -5 -4 -2 -2 -2 -5 -19

 

Continued

 

 

 

 

 

 

 

 
Honorable Nancy Pelosi 

Page 6 

Table 1. Continued. 

Sources: Congressional Budget Office and staff of the Joint Committee on Taxation (JCT). 

Notes: Positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit. 

 

 Components may not sum to totals because of rounding; * = between $0.5 billion and -$0.5 billion. 

 

a. Does not include effects on spending subject to future appropriations. 

 

b. Includes excise tax on high-premium insurance plans. 

c. These estimates reflect the effects of provisions affecting Medicare, Medicaid, and other federal health programs, and include 

the effects of interactions between insurance coverage provisions and those programs; they also reflect the effects of 

education provisions. 

d. The changes in revenues include effects on Social Security revenues, which are classified as off-budget. The 10-year figure of

$420 billion includes $406 billion in revenues from tax provisions (estimated by JCT) apart from receipts from the excise tax 

on high-premium insurance plans and $14 billion in revenues from certain provisions affecting Medicare, Medicaid, and other 

programs (estimated by CBO and JCT). (For JCT’s estimates, see JCX-17-10.) 

e. Off-budget effects include changes in Social Security spending and revenues as well as U.S. Postal Service spending. 

Education Provisions Contained in the Reconciliation Proposal 

Subtitle A of title II of the reconciliation proposal would amend the Higher 

Education Act of 1965, which authorizes most federal postsecondary 

education programs. The reconciliation proposal would eliminate the 

federal program that provides guarantees for student loans and replace 

those loans with direct loans made by the Department of Education. It 

would also increase direct spending for the Pell Grant program and other 

education grant programs. CBO estimates that those provisions would 

reduce direct spending by $5 billion over the 2010–2014 period and 

$19 billion over the 2010–2019 period (see Table 7). 

Federal Student Loan Programs. On net, CBO estimates that the 

reconciliation proposal would reduce direct spending in the federal student 

loan programs by $28 billion over the 2010–2014 period and $58 billion 

over the 2010–2019 period. 

In the Federal Family Education Loan (FFEL) program, private lenders 

originate loans to postsecondary students; the federal government makes 

payments to those lenders, guarantees them against significant loss in the 

case of default, and provides funds to guaranty agencies to help administer 

those loans. In the direct loan program, eligible borrowers receive nearly 

identical loans that are administered by the Department of Education and 

funded through the U.S. Treasury. 
Honorable Nancy Pelosi 

Page 7 

The reconciliation proposal would eliminate new loans in the FFEL 

program beginning in July 2010. Under the proposal, CBO expects that all 

of the guaranteed loans that would have been made under current law—

estimated to be roughly $500 billion through 2019—would instead be made 

through the direct loan program. 

The Federal Credit Reform Act specifies that the cost of new federal loans 

and loan guarantees be recorded in the budget in the year that the loans are 

disbursed, and that the cost be calculated as the net present value of the 

government’s expected cash flows over the lifetime of a loan or guarantee, 

using interest rates on Treasury securities of comparable maturity to 

discount the estimated cash flows.5

 Using this methodology, CBO estimates 

that eliminating new guaranteed loans and replacing them with direct loans 

would yield reductions in direct spending of $61 billion over the 2010–

2019 period. CBO also estimates that the expanded program for direct loans 

would incur about $5 billion in additional administrative costs during that 

period. However, those additional costs are classified as discretionary 

spending and are subject to future appropriation; they are not incorporated 

in the estimates of changes in direct spending and revenues reported in this 

letter. 

The legislation would also make other changes to federal loan programs for 

education. CBO estimates that those changes would increase direct 

spending by $1 billion over the 2010–2014 period and $3 billion over the 

2010–2019 period—partially offsetting the gross savings from eliminating 

new guaranteed loans in the FFEL program. 

Federal Pell Grant Program. The reconciliation proposal would alter the 

structure of the Pell Grant program and provide additional funding for that 

program. CBO estimates that those changes would increase direct spending 

by $21 billion over the 2010–2014 period and $36 billion over the 2010–

2019 period. 

Under current law, Pell grants are funded through both discretionary and 

mandatory funding. The annual discretionary appropriation sets a base 

award level, and a mandatory account provides additional funding to 

 

5

 An alternative approach to estimating the cost of federal loans and loan guarantees is to estimate 

what a private entity would need to be paid to assume the costs and risks to the government from 

providing such loans or guarantees. For further discussion of that so-called “fair-value” 

methodology, and for estimates of the cost of replacing guaranteed loans with direct loans based 

on different methodologies, see Congressional Budget Office, letter to the Honorable Judd Gregg 

regarding the budgetary impact of the President’s proposal to alter federal student loan programs 

(March 15, 2010). 
Honorable Nancy Pelosi 

Page 8 

students eligible for the program. The dollar amount of the additional 

mandatory awards is determined by the amount directly appropriated in the 

Higher Education Act. 

Beginning in fiscal year 2010, the reconciliation proposal would 

appropriate the amounts necessary to cover the cost of specified award 

levels in the Pell Grant program. For academic years through 2012–2013, 

the proposal would maintain the additional mandatory award at $690, as 

specified in current law for 2010–2011 and 2011–2012. (Under current 

law, however, there are not sufficient funds to cover all the costs of 

providing that $690 add-on to all Pell grant recipients; the proposal would 

provide the incremental funds necessary to do so.) Beginning in academic 

year 2013–2014, the mandatory award would increase according to a 

formula specified in the legislation. CBO estimates that the add-on would 

reach $1,115 for academic year 2017–2018 and subsequent years. 

CBO estimates that the increase in the mandatory add-on for Pell grants 

would raise direct spending by $23 billion over the 2010–2019 period. In 

addition, the legislation would provide roughly $14 billion in further 

mandatory funds to the Pell Grant program; CBO expects that most of that 

additional funding would be spent in fiscal years 2011 and 2012. 

Other Education Grant Programs. Finally, the education subtitle would 

appropriate $255 million per year through 2019 for grants to Historically 

Black Colleges and Universities and other Minority Serving Institutions. It 

would also appropriate $150 million per year through 2014 for College 

Access Challenge Grants. CBO estimates that those provisions would 

increase direct spending by $2 billion over the 2010–2014 period and by 

$3 billion over the 2010–2019 period.

Changes to H.R. 3590 Contained in the Reconciliation Proposal 

The reconciliation proposal would make a variety of changes to H.R. 3590, 

as passed by the Senate. The changes with the largest budgetary effects 

over the 2010–2019 period include these: 

 Increasing the subsidies for premiums and cost sharing that would be 

offered through the new insurance exchanges; 

 Increasing the penalties for employers that do not offer health 

insurance and modifying the penalties for individuals who do not 

obtain insurance; 
Honorable Nancy Pelosi 

Page 9 

 Increasing the federal share of spending for certain Medicaid 

beneficiaries; 

 Changing eligibility for Medicaid in a way that effectively increases 

the income threshold from 133 percent of the federal poverty level to 

138 percent for certain individuals; 

 Reducing overall payments to insurance plans under the Medicare 

Advantage program; 

 Expanding Medicare’s drug benefit by phasing out the “doughnut 

hole” in that benefit; 

 Modifying the design and delaying the implementation of the excise 

tax on insurance plans with relatively high premiums; and 

 Increasing the rate and expanding the scope of a tax that would be 

charged to higher-income households. 

Effects of the Legislation on Insurance Coverage 

CBO and JCT estimate that by 2019, the combined effect of enacting 

H.R. 3590 and the reconciliation proposal would be to reduce the number 

of nonelderly people who are uninsured by about 32 million, leaving about 

23 million nonelderly residents uninsured (about one-third of whom would 

be unauthorized immigrants). Under the legislation, the share of legal 

nonelderly residents with insurance coverage would rise from about 

83 percent currently to about 94 percent. 

Approximately 24 million people would purchase their own coverage 

through the new insurance exchanges, and there would be roughly 

16 million more enrollees in Medicaid and the Children’s Health Insurance 

Program than the number projected under current law. Relative to currently 

projected levels, the number of people purchasing individual coverage 

outside the exchanges would decline by about 5 million. 

Under the legislation, certain employers could allow all of their workers to 

choose among the plans available in the exchanges, but those enrollees 

would not be eligible to receive subsidies via the exchanges (and thus are 

shown in Table 4 as enrollees in employment-based coverage rather than as 

exchange enrollees). Approximately 5 million people would obtain 

coverage in that way in 2019, bringing the total number of people enrolled 

in exchange plans to about 29 million in that year. 
Honorable Nancy Pelosi 

Page 10 

On balance, the number of people obtaining coverage through their 

employer would be about 3 million lower in 2019 under the legislation, 

CBO and JCT estimate. The net change in employment-based coverage 

under the proposal would be the result of several flows, which can be 

illustrated using the estimates for 2019: 

 Between 6 million and 7 million people would be covered by an 

employment-based plan under the proposal who would not be 

covered by one under current law (largely because the mandate for 

individuals to be insured would increase workers’ demand for 

coverage through their employers). 

 Between 8 million and 9 million other people who would be covered 

by an employment-based plan under current law would not have an 

offer of such coverage under the proposal. Firms that would choose 

not to offer coverage as a result of the proposal would tend to be 

smaller employers and employers that predominantly employ lowerwage workers—people who would be eligible for subsidies through 

the exchanges—although some workers who would not have 

employment-based coverage because of the proposal would not be 

eligible for such subsidies. Whether those changes in coverage 

would represent the dropping of existing coverage or a lack of new 

offers of coverage is difficult to determine. 

 Between 1 million and 2 million people who would be covered by 

their employer’s plan (or a plan offered to a family member) under 

current law would instead obtain coverage in the exchanges. Under 

the legislation, workers with an offer of employment-based coverage 

would generally be ineligible for exchange subsidies, but that 

“firewall” would be enforced imperfectly and an explicit exception 

to it would be made for workers whose offer was deemed 

unaffordable. 

Effects of the Legislation on Discretionary Costs 

CBO has not completed an estimate of the potential impact of the 

legislation on discretionary spending, which would be subject to future 

appropriation action. Discretionary costs would arise from the effects of the 

legislation on several federal agencies and on a number of new and existing 

programs subject to future appropriation. Those discretionary costs fall into 

three general categories. 
Honorable Nancy Pelosi 

Page 11 

The first category is implicit authorization of discretionary costs associated 

with implementing the new policies established under the legislation. 

Although no provisions in the legislation specifically authorize such 

spending, it would be necessary for agencies to carry out the 

responsibilities that would be required of them by the bill. For example: 

 CBO expects that the cost to the Internal Revenue Service of 

implementing the eligibility determination, documentation, and 

verification processes for premium and cost sharing subsidies would 

probably be between $5 billion and $10 billion over 10 years. 

 CBO expects that the costs to the Department of Health and Human 

Services (especially the Centers for Medicare and Medicaid 

Services) and the Office of Personnel Management of implementing 

the changes in Medicare, Medicaid, and the Children’s Health 

Insurance Program, as well as certain reforms to the private 

insurance market, would probably be at least $5 billion to $10 billion 

over 10 years. (The administrative costs of establishing and 

operating the exchanges were included as direct spending in CBO’s 

estimate for the legislation.) 

The second category of discretionary costs is explicit authorizations for a 

variety of grant and other programs for which specified funding levels for 

possible future appropriations are set in the act for one or more years. (Such 

cases include provisions where a specified funding level is authorized for 

an initial year along with the authorization of such sums as may be 

necessary for continued funding in subsequent years.) CBO has identified 

at least $50 billion in such specified and estimated authorizations in 

H.R. 3590, as passed by the Senate.6

A third category of discretionary spending is explicit authorizations for a 

variety of grant and other programs for which no funding levels are 

specified in the legislation. CBO has not yet completed estimates of the 

amounts of such authorizations. 

Effects of the Legislation Beyond the First 10 Years 

Although CBO does not generally provide cost estimates beyond the 

10-year budget projection period, certain Congressional rules require some 

information about the budgetary impact of legislation in subsequent 

 

6

 For further details, see Congressional Budget Office, Potential Effects of the Patient Protection 

and Affordable Care Act on Discretionary Spending (March 15, 2010). 
Honorable Nancy Pelosi 

Page 12 

decades, and many Members have requested CBO’s analysis of the longterm budgetary impact of broad changes in the nation’s health care and 

health insurance systems. Therefore, CBO has developed a rough outlook 

for the decade following the 2010–2019 period by grouping the elements of 

the legislation into broad categories and (together with JCT) assessing the 

rate at which the budgetary impact of each of those broad categories is 

likely to increase over time. 

Effects on the Deficit. Using this analytic approach, CBO estimated that 

enacting H.R. 3590, as passed by the Senate, would reduce federal budget 

deficits over the ensuing decade relative to those projected under current 

law—with a total effect during that decade in a broad range between onequarter percent and one-half percent of gross domestic product (GDP).7

 The 

imprecision of that calculation reflects the even greater degree of 

uncertainty that attends to it, compared with CBO’s 10-year budget 

estimates. 

The reconciliation proposal would make a variety of changes to H.R. 3590 

that would have significant effects on the legislation’s overall budgetary 

impact—both in the 10-year projection period and in the ensuing decade. 

For example, the reconciliation proposal would increase the premium 

subsidies offered in the new insurance exchanges beginning in 2014, but 

would also change the annual indexing provisions beginning in 2019 so that 

those subsidies would grow more slowly thereafter. Over time, the 

spending on exchange subsidies would therefore fall back toward the level 

under H.R. 3590 by itself. As another example, the reconciliation proposal 

would reduce the impact in the 10-year projection period of an excise tax 

on health insurance plans with relatively high premiums, but would index 

the thresholds for the tax, beginning in 2020, to the rate of general inflation 

rather than to inflation plus 1 percentage point (as in H.R. 3590). 

Reflecting the changes made by the reconciliation proposal, the combined 

effect of enacting H.R. 3590 and the reconciliation proposal would also be 

to reduce federal budget deficits over the ensuing decade relative to those 

projected under current law—with a total effect during that decade in a 

broad range around one-half percent of GDP. The incremental effect of 

enacting the reconciliation bill (over and above the effect of enacting 

H.R. 3590 by itself) would thus be to further reduce federal budget deficits 

 

7

 For a more extensive explanation of that analysis, see Congressional Budget Office, letter to the 

Honorable Harry Reid regarding the longer-term effects of the manager’s amendment to the 

Patient Protection and Affordable Care Act (December 20, 2009). 
Honorable Nancy Pelosi 

Page 13 

in that decade, with an effect in a broad range between zero and one-quarter 

percent of GDP. 

CBO has not extrapolated estimates further into the future because the 

uncertainties surrounding them are magnified even more. However, in view 

of the projected net savings during the decade following the 10-year budget 

window, CBO anticipates that the reconciliation proposal would probably 

continue to reduce budget deficits relative to those under current law in 

subsequent decades, assuming that all of its provisions continued to be fully 

implemented. 

Congressional rules governing the consideration of reconciliation bills also 

require an assessment of their budgetary impact separately by title, as 

shown in Table 7 for the 2010–2019 period. Relative to H.R. 3590, CBO’s 

analysis of the longer-term effects of the reconciliation proposal, by title, is 

as follows: 

 Most of the changes to H.R. 3590 having significant budgetary 

effects would be made by title I of the reconciliation proposal, so the 

conclusions about the longer-term impact for the proposal as a 

whole—that it would reduce deficits relative to those under 

H.R. 3590—also apply to that title. 

 The changes regarding health care contained in title II would have a 

much smaller budgetary impact than those in title I and would, by 

themselves, increase budget deficits somewhat during the 2010–

2019 period and in the ensuing decade. That title also contains the 

proposal’s education provisions, which CBO estimates would reduce 

deficits during the next 10 years and in the following decade. In 

CBO’s estimation, the savings generated by the education provisions 

would outweigh the costs related to health care arising from title II, 

so the title as a whole would reduce budget deficits in both the 

10-year projection period and subsequent years. 

CBO has not yet completed an assessment of the impact for the longer term 

of enacting the reconciliation proposal by itself—that is, an assessment of 

the reconciliation proposal’s longer-term impact under current law. 

Key Considerations. Those longer-term calculations reflect an assumption 

that the provisions of the reconciliation proposal and H.R. 3590 are enacted 

and remain unchanged throughout the next two decades, which is often not 

the case for major legislation. For example, the sustainable growth rate 
Honorable Nancy Pelosi 

Page 14 

mechanism governing Medicare’s payments to physicians has frequently 

been modified (either through legislation or administrative action) to avoid 

reductions in those payments, and legislation to do so again is currently 

under consideration by the Congress. 

The reconciliation proposal and H.R. 3590 would maintain and put into 

effect a number of policies that might be difficult to sustain over a long 

period of time. Under current law, payment rates for physicians’ services in 

Medicare would be reduced by about 21 percent in 2010 and then decline 

further in subsequent years; the proposal makes no changes to those 

provisions. At the same time, the legislation includes a number of 

provisions that would constrain payment rates for other providers of 

Medicare services. In particular, increases in payment rates for many 

providers would be held below the rate of inflation (in expectation of 

ongoing productivity improvements in the delivery of health care). The 

projected longer-term savings for the legislation also reflect an assumption 

that the Independent Payment Advisory Board established by H.R. 3590 

would be fairly effective in reducing costs beyond the reductions that 

would be achieved by other aspects of the legislation.8

Under the legislation, CBO expects that Medicare spending would increase 

significantly more slowly during the next two decades than it has increased 

during the past two decades (per beneficiary, after adjusting for inflation). It 

is unclear whether such a reduction in the growth rate of spending could be 

achieved, and if so, whether it would be accomplished through greater 

efficiencies in the delivery of health care or through reductions in access to 

care or the quality of care. The long-term budgetary impact could be quite 

different if key provisions of the legislation were ultimately changed or not 

fully implemented.9

 If those changes arose from future legislation, CBO 

would estimate their costs when that legislation was being considered by 

the Congress. 

Other Effects of the Legislation 

Many Members have expressed interest in the effects of proposals on 

various other measures of spending on health care. One such measure is the 

 

8

 The Independent Payment Advisory Board would be required, under certain circumstances, to 

recommend changes to the Medicare program to limit the rate of growth in that program’s 

spending. The Board’s recommendations would go into effect automatically unless blocked by 

subsequent legislative action. 

9

 For an example of the long-term budgetary effect of altering several key features of the 

legislation, see Congressional Budget Office, letter to the Honorable Paul Ryan responding to 

questions about the preliminary estimate of the reconciliation proposal (March 19, 2010). 
Honorable Nancy Pelosi 

Page 15 

“federal budgetary commitment to health care,” a term that CBO uses to 

describe the sum of net federal outlays for health programs and tax 

preferences for health care.10 CBO estimated that H.R. 3590, as passed by 

the Senate, would increase the federal budgetary commitment to health care 

over the 2010–2019 period; the net increase in that commitment would be 

about $210 billion over that 10-year period. The combined effect of 

enacting H.R. 3590 and the reconciliation proposal would be to increase 

that commitment by about $390 billion over 10 years. Thus, the 

incremental effect of the reconciliation proposal (if H.R. 3590 had been 

enacted) would be to increase the federal budgetary commitment to health 

care by about $180 billion over the 2010–2019 period. 

In subsequent years, the effects of the provisions of the two bills combined 

that would tend to decrease the federal budgetary commitment to health 

care would grow faster than the effects of the provisions that would 

increase it. As a result, CBO expects that enacting both proposals would 

generate a reduction in the federal budgetary commitment to health care 

during the decade following the 10-year budget window—which is the 

same conclusion that CBO reached about H.R. 3590, as passed by the 

Senate. 

Members have also requested information about the effect of the legislation 

on health insurance premiums. On November 30, 2009, CBO released an 

analysis prepared by CBO and JCT of the expected impact on average 

premiums for health insurance in different markets of PPACA as originally 

proposed.11 Although CBO and JCT have not updated the estimates 

provided in that letter, the effects on premiums of the legislation as passed 

by the Senate and modified by the reconciliation proposal would probably 

be quite similar. 

CBO and JCT previously determined that H.R. 3590, as passed by the 

Senate, would impose several intergovernmental and private-sector 

mandates as defined in the Unfunded Mandates Reform Act (UMRA). 

CBO and JCT estimated that the total costs of those mandates to state, 

local, and tribal governments and the private sector would greatly exceed 

the annual thresholds established in UMRA ($70 million and $141 million, 

 

10 For additional discussion of that term, see Congressional Budget Office, letter to the Honorable 

Max Baucus regarding different measures for analyzing current proposals to reform health care 

(October 30, 2009). 

11 See Congressional Budget Office, letter to the Honorable Evan Bayh providing an analysis of 

health insurance premiums under the Patient Protection and Affordable Care Act 

(November 30, 2009). 
Honorable Nancy Pelosi 

Page 16 

respectively, in 2010, adjusted annually for inflation) in each of the first 

five years that the mandates would be in effect. 

If both the reconciliation proposal and H.R. 3590 were enacted, that 

combination would impose similar mandates on both intergovernmental 

and private-sector entities with costs exceeding the thresholds established 

in UMRA. The incremental effect of enacting the reconciliation proposal—

assuming that H.R. 3590 had already been enacted—would be to increase 

the costs of the mandates on private-sector entities. That increase in costs 

would exceed the annual UMRA threshold as well. 

I hope this analysis is helpful for the Congress’s deliberations. If you have 

any questions, please contact me or CBO staff. Many people at CBO have 

contributed to this analysis, but the primary staff contacts are David 

Auerbach, Colin Baker, Reagan Baughman, James Baumgardner, Tom 

Bradley, Stephanie Cameron, Julia Christensen, Mindy Cohen, Anna Cook, 

Noelia Duchovny, Sean Dunbar, Philip Ellis, Peter Fontaine, April Grady, 

Stuart Hagen, Holly Harvey, Tamara Hayford, Jean Hearne, Janet 

Holtzblatt, Lori Housman, Justin Humphrey, Paul Jacobs, Deborah 

Kalcevic, Daniel Kao, Jamease Kowalczyk, Julie Lee, Kate Massey, 

Alexandra Minicozzi, Keisuke Nakagawa, Kirstin Nelson, Lyle Nelson, 

Andrea Noda, Sam Papenfuss, Lisa Ramirez-Branum, Lara Robillard, 

Robert Stewart, Robert Sunshine, Bruce Vavrichek, Ellen Werble, Chapin 

White, and Rebecca Yip. 

Sincerely, 

Douglas W. Elmendorf 

Director 

Enclosures 

cc: Honorable John A. Boehner 

Republican Leader 

Honorable John M. Spratt Jr. 

Chairman 

Committee on the Budget 
Honorable Nancy Pelosi 

Page 17 

Honorable Paul Ryan 

Ranking Member 

 Honorable Harry Reid 

 Senate Majority Leader 

Honorable Mitch McConnell 

 Senate Republican Leader 

 Honorable Kent Conrad 

 Chairman 

 Senate Committee on the Budget 

 

Honorable Judd Gregg 

 Ranking Member 
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Education * * 4 -6 -3 -5 -4 -2 -2 -2 -5 -19

Health Insurance Exchanges

Premium and Cost Sharing Subsidies 0 0 0 0 14 32 59 75 82 88 14 350

Start-up Costs * * * 1 * * 0 0 0 0 2 2

Other Related Spending 0 1 2 2 1 * * * * 0 5 5

Subtotal 0 2 2 2 15 33 59 75 82 88 21 358

Reinsurance and Risk 

Adjustment Paymentsa 0 0 0 0 11 18 18 18 19 21 11 106

Effects of Coverage Provisions 

on Medicaid and CHIP * -1 -2 -4 29 56 81 87 91 97 22 434

Medicare and Other Medicaid and CHIP Provisions

Reductions in Annual Updates to 

Medicare FFS Payment Rates * -1 -5 -9 -13 -19 -25 -33 -41 -51 -28 -196

Medicare Advantage Rates based on 

Fee-for-Service Rates 0 -2 -6 -9 -13 -17 -19 -21 -23 -25 -30 -136

Medicare and Medicaid DSH Payments 0 0 * * -1 -4 -5 -7 -9 -11 * -36

Other 2 1 * * -16 -11 -10 -14 -18 -22 -12 -87

Subtotal 2 -2 -11 -17 -42 -50 -59 -75 -92 -108 -71 -455

Other Changes in Direct Spending

Community Living Assistance 

Services and Supports 0 0 -5 -9 -10 -11 -11 -9 -8 -7 -24 -70

Other 2 6 8 5 5 4 2 -1 -1 * 26 30

Subtotal 2 6 2 -4 -5 -7 -10 -10 -8 -7 2 -40

Total Outlays 4 5 -5 -28 6 44 86 92 90 90 -20 382

On-Budget 4 5 -5 -28 5 44 85 92 89 89 -20 379

Off-Budget 0 * * * * * 1 1 1 1 * 4

Continued

 H.R. 3590 as Passed by the Senate

TABLE 2. Estimate of Changes in Direct Spending and Revenue Effects of the Reconciliation Proposal Combined with

By Fiscal Year, in Billions of Dollars

CHANGES IN DIRECT SPENDING (OUTLAYS)
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

 H.R. 3590 as Passed by the Senate

TABLE 2. Estimate of Changes in Direct Spending and Revenue Effects of the Reconciliation Proposal Combined with

By Fiscal Year, in Billions of Dollars

Coverage-Related Provisions

Exchange Premium Credits 0 0 0 0 -5 -11 -18 -22 -24 -26 -5 -107

Reinsurance and Risk Adjustment

Collections 0 0 0 0 12 16 18 18 19 22 12 106

Small Employer Tax Credit -2 -4 -5 -6 -5 -3 -3 -3 -4 -4 -21 -37

Penalty Payments by Employers 

and Uninsured Individuals 0 0 0 0 3 9 12 13 13 14 3 65

Excise Tax on High-Premium Plans 0 0 0 0 0 0 0 0 12 20 0 32

Associated Effects of Coverage 

Provisions on Revenues * -1 -2 -5 1 6 14 18 10 7 -8 46

Other Provisions

Fees on Certain Manufacturers 

and Insurersb 0 2 3 5 12 15 15 18 19 18 22 107

Additional Hospital insurance Tax 0 0 1 21 17 29 33 35 37 39 38 210

Other Revenue Provisionsc * 7 8 13 22 4 11 12 13 14 49 103

Total Revenues -3 3 5 27 57 65 83 89 95 104 89 525

On-Budget -3 4 5 27 55 62 78 82 87 95 88 492

Off-Budget * * -1 1 2 3 5 7 8 9 1 33

Net Change in the Deficit 6 1 -10 -56 -51 -20 3 4 -5 -15 -109 -143

On-Budget 6 1 -10 -55 -50 -18 8 10 2 -6 -108 -114

Off-Budget * * 1 -1 -1 -2 -5 -6 -7 -9 -1 -29

Sources: Congressional Budget Office and staff of the Joint Committee on Taxation (JCT).

NotesDoes not include effects on spending subject to future appropriation. Components may not sum to totals because of rounding.

* = between $0.5 billion and -$0.5 billion.

CHIP = Children’s Health Insurance Program; FFS = Fee-for-service; DSH = Disproportionate Share Hospital.

a. Risk-adjustment payments lag revenues shown later in the table by one quarter. Reinsurance payments total $20 billion over the 10-year period.

b. Amounts include fees on manufacturers and importers of branded drugs and certain medical devices as well as fees on health insurance providers.

d. Positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit.

In addition, this line includes an increase in revenues of about $14 billion for other provisions shown in Table 5.

c. Amounts include $89 billion in increased revenues, as estimated by JCT, for tax provisions other than those broken out separately in the table. 

NET IMPACT ON THE DEFICIT FROM CHANGES IN DIRECT SPENDING AND REVENUESd

CHANGES IN REVENUES
Table 3. Estimate of the Incremental Effects on Deficits of the Reconciliation Proposal, Relative to 

H.R. 3590 as Passed by the Senate

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Change in Outlays * 6 6 -1 * -1 3 5 5 4 12 27

On Budget * 6 6 -1 * -1 3 6 5 4 12 28

Off Budget 0 * * * * * * * * * * -1

Change in Revenues -2 2 2 2 13 3 10 8 7 7 17 52

On Budget -2 3 2 5 13 6 14 13 11 12 21 76

Off Budget 0 * * -4 -1 -3 -4 -5 -4 -4 -5 -24

Net Change in Deficits 2 4 4 -3 -13 -4 -7 -3 -2 -3 -5 -25

On Budget 2 4 4 -6 -14 -7 -11 -7 -6 -7 -10 -48

Off Budget 0 * * 4 1 3 4 4 4 4 5 23

Sources: Congressional Budget Office and staff of the Joint Committee on Taxation (JCT).

Notes: Positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit.

Components may not sum to totals because of rounding; * = between $0.5 billion and -$0.5 billion.

a. Positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit.

By Fiscal Year, in Billions of Dollars

CHANGES IN DIRECT SPENDING

CHANGES IN REVENUES

NET IMPACT ON DEFICITS FROM CHANGES IN DIRECT SPENDING AND REVENUES /a

Congressional Budget Office Page 1 of 1 3/20/2010
EFFECTS ON INSURANCE COVERAGE /a 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

(Millions of nonelderly people, by calendar year)

 Current Law Medicaid & CHIP 40 39 39 38 35 34 35 35 35 35

 Coverage /b Employer 150 153 156 158 161 162 162 162 162 162

Nongroup & Other /c 27 26 25 26 28 29 29 29 30 30

Uninsured /d 50 51 51 51 51 51 52 53 53 54

TOTAL 267 269 271 273 274 276 277 279 281 282

 Change (+/-) Medicaid & CHIP * -1 -2 -3 10 15 17 16 16 16

Employer * 3 3 3 4 1 -3 -3 -3 -3

Nongroup & Other /c * * * * -2 -3 -5 -5 -5 -5

Exchanges 0 0 0 0 8 13 21 23 24 24

Uninsured /d * * -1 -1 -19 -25 -30 -31 -31 -32

Post-Policy Uninsured Population

 Number of Nonelderly People /d 50 50 50 50 31 26 21 21 22 23

 Insured Share of the Nonelderly Population /a

 Including All Residents 81% 82% 82% 82% 89% 91% 92% 92% 92% 92%

 Excluding Unauthorized Immigrants 83% 83% 83% 83% 91% 93% 95% 95% 95% 94%

Memo: Exchange Enrollees and Subsidies

 Number w/ Unaffordable Offer from Employer /e * 1 1 1 1 1

 Number of Unsubsidized Exchange Enrollees 1 2 4 5 5 5

 Average Exchange Subsidy per Subsidized Enrollee $5,200 $5,300 $5,500 $5,700 $6,000

Sources: Congressional Budget Office and the staff of the Joint Committee on Taxation. 

Note: CHIP = Children's Health Insurance Program; * = between 0.5 million and -0.5 million people. 

a. Figures for the nonelderly population include only residents of the 50 states and the District of Columbia. 

b. Figures reflect average annual enrollment; individuals reporting multiple sources of coverage are assigned a primary source. 

c. Other, which includes Medicare, accounts for about half of current-law coverage in this category; the effects of the proposal are almost entirely on nongroup coverage. 3/20/2010

d. The count of uninsured people includes unauthorized immigrants as well as people who are eligible for, but not enrolled in, Medicaid. Page 1 of 2

e. Workers who would have to pay more than a specified share of their income (9.5 percent in 2014) for employment-based coverage could receive subsidies via an exchange. 

Table 4. Estimated Effects of the Insurance Coverage Provisions of the Reconciliation Proposal Combined with H.R. 3590 as 

Passed by the Senate
EFFECTS ON THE FEDERAL DEFICIT / a,b 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010-2019

(Billions of dollars, by fiscal year)

 Medicaid & CHIP Outlays /c 0 -1 -2 -4 29 56 81 87 91 97 434

 Exchange Subsidies & Related Spending /d 0 2 2 2 20 45 77 97 106 113 464

 Small Employer Tax Credits /e 2 4 5 6 5 4 3 3 4 4 40

 Gross Cost of Coverage Provisions 2 5 5 5 54 104 161 187 201 214 938

 Penalty Payments by Uninsured Individuals 0 0 0 0 0 -2 -3 -4 -4 -4 -17

 Penalty Payments by Employers /e 0 0 0 0 -3 -8 -10 -10 -10 -11 -52

 Excise Tax on High-Premium Insurance Plans /e 0 0 0 0 0 0 0 0 -12 -20 -32

 Other Effects on Tax Revenues and Outlays /f 1 3 4 5 -1 -7 -15 -20 -11 -7 -48

 NET COST OF COVERAGE PROVISIONS 3 7 9 10 49 87 132 154 164 172 788

Sources: Congressional Budget Office and the staff of the Joint Committee on Taxation. 

Note: CHIP = Children's Health Insurance Program. 

a. Does not include federal administrative costs that would be subject to appropriation. 

b. Components may not sum to totals because of rounding; positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit. 

e. The effects on the deficit of this provision include the associated effects of changes in taxable compensation on tax revenues. 3/20/2010

f. The effects are almost entirely on tax revenues. CBO estimates that outlays for Social Security benefits would increase by about $2 billion over the 2010-2019 period, Page 2 of 2

and that the coverage provisions would have negligible effects on outlays for other federal programs. 

d. Includes $5 billion in spending for high-risk pools and the net budgetary effects of proposed collections and payments for reinsurance and risk adjustment. 

Table 4. Estimated Effects of the Insurance Coverage Provisions of the Reconciliation Proposal Combined with H.R. 3590 as 

Passed by the Senate

c. Under current law, states have the flexibility to make programmatic and other budgetary changes to Medicaid and CHIP. CBO estimates that state spending on 

Medicaid and CHIP in the 2010-2019 period would increase by about $20 billion as a result of the coverage provisions. 
Table 5. Estimate of the Effects of Non-Coverage Health Provisions of the Reconciliation Proposal 

Combined with H.R. 3590 as Passed by the Senate

Estimated effects on direct spending and revenues in billions of dollars, by fiscal year

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Change 

from 

H.R. 3590a

Changes in Direct Spending Outlays

TITLE I—QUALITY, AFFORDABLE HEALTH CARE FOR ALL AMERICANS

Subtitle A—Immediate Improvements in Health Care Coverage for All Americans

 1001 Amendments to the Public Health Service Act Included in estimate for expanding health insurance coverage.

 1002 Helping Consumers Receive Quality Accountable Coverage 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle B—Immediate Assistance to Preserve and Expand Coverage

 1101 Temporary High Risk Health Insurance Pool Included in estimate for expanding health insurance coverage.

 1102 Reinsurance for Early Retirees 1.3 2.5 1.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.0 5.0 0.0

 1103 Assistance to Consumers in Identifying Affordable Coverage Options Included in estimate for expanding health insurance coverage.

 1104 Administrative Simplification

Effects on Medicaid spending 0.0 0.0 -0.1 -0.1 -0.2 -0.4 -0.9 -1.7 -1.9 -2.1 -0.4 -7.3 -0.2

Effects on exchange subsidies 0.0 0.0 0.0 0.0 -0.1 -0.3 -0.6 -1.0 -1.2 -1.2 -0.1 -4.3 0.0

Subtitle C—Effective Coverage for All Americans Included in estimate for expanding health insurance coverage.

Subtitle D—Available Coverage for All Americans Included in estimate for expanding health insurance coverage.

Subtitle E—Affordable Coverage for All Americans Included in estimate for expanding health insurance coverage.

Subtitle F—Shared Responsibility for Health Care Included in estimate for expanding health insurance coverage.

Subtitle G—Miscellaneous Provisions

 1556 Equity for Certain Eligible Survivors 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Sections 1551-1555 and 1557-1562 Included in estimate for expanding health insurance coverage.

TITLE II—ROLE OF PUBLIC PROGRAMS

Subtitle A—Improved Access to Medicaid

Sections 2001-2004 Included in estimate for expanding health insurance coverage.

2005 Payments to Territories 0.0 0.3 0.7 0.7 0.9 0.9 0.9 1.0 1.0 1.0 2.5 7.3 2.0

2006 Special Adjustment to FMAP Determination for Certain States 

Recovering from a Major Disaster 0.0 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.2 0.0

2007 Medicaid Improvement Fund Rescission 0.0 0.0 0.0 0.0 0.0 -0.2 -0.2 -0.2 -0.2 0.0 0.0 -0.6 0.0

Subtitle B—Enhanced Support for the Children’s Health Insurance Program

 2101 Additional Federal Financial Participation for CHIP Included in estimate for expanding health insurance coverage.

 2102 Technical Corrections 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0

Subtitle C—Medicaid and CHIP Enrollment Simplification Included in estimate for expanding health insurance coverage.

Congressional Budget Office Page 1 of 11 3/20/2010
Table 5. Estimate of the Effects of Non-Coverage Health Provisions of the Reconciliation Proposal 

Combined with H.R. 3590 as Passed by the Senate

Estimated effects on direct spending and revenues in billions of dollars, by fiscal year

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Change 

from 

H.R. 3590a

Subtitle D—Improvements to Medicaid Services

 2301 Coverage for Freestanding Birth Center Services 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 2302 Concurrent Care for Children 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.0

2303 State Eligibility Option for Family Planning Services 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

2304 Clarification of Definition of Medical Assistance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle E—New Options for States to Provide Long-Term Services and Supports

 2401 Community First Choice Option 0.0 0.0 0.1 0.2 0.3 0.8 0.9 1.0 1.2 1.4 0.6 6.0 -0.9

 2402 Removal of Barriers to Providing Home and Community-Based Services 0.0 0.1 0.1 0.1 0.2 0.3 0.4 0.4 0.4 0.4 0.5 2.4 0.0

 2403 Money Follows the Person Rebalancing Demonstration 0.0 0.0 0.0 0.0 0.1 0.2 0.3 0.4 0.3 0.3 0.2 1.7 0.0

 2404 Protection for Recipients of Home and Community-Based Services 

Against Spousal Impoverishment 0.0 0.0 0.0 0.0 0.2 0.3 0.3 0.3 0.3 0.2 0.2 1.5 0.0

 2405 Funding to Expand State Aging and Disability Resource Centers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0

 2406 Sense of the Senate Regarding Long-Term Care 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10202 Incentives for States to Offer Home and Community-Based Services as a 

Long-Term Care Alternative to Nursing Homes 0.0 0.0 0.1 0.2 0.3 0.3 0.2 0.2 0.2 0.2 0.7 1.8 0.2

Subtitle F—Medicaid Prescription Drug Coverage -0.4 -2.5 -3.2 -3.3 -3.7 -4.1 -4.7 -5.0 -5.4 -5.8 -13.1 -38.1 -0.1

Subtitle G—Medicaid Disproportionate Share Hospital (DSH) Payments 0.0 0.0 0.0 0.1 -0.5 -0.6 -0.6 -1.8 -5.0 -5.6 -0.4 -14.0 4.1

Subtitle H—Improved Coordination for Dual Eligible Beneficiaries

 2601 5-Year Period for Demonstration Projects 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 2602 Providing Federal Coverage and Payment Coordination for 

Dual Eligible Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle I—Improving the Quality of Medicaid for Patients and Providers

 2701 Adult Health Quality Measures 0.0 0.0 0.0 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.2 0.3 0.0

 2702 Payment Adjustment for Health Care-Acquired Conditions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 2703 State Option to Provide Health Homes for Enrollees With Chronic Conditions 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.7 0.0

 2704 Demonstration Project to Evaluate Integrated Care Around a Hospitalization 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 2705 Medicaid Global Payment System Demonstration Project 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 2706 Pediatric Accountable Care Organization Demonstration Project 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 2707 Medicaid Emergency Psychiatric Demonstration Project 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0

Subtitle J—Improvements to the Medicaid and CHIP Payment and 

Access Commission (MACPAC)

 2801 MACPAC Assessment of Policies Affecting All Medicaid Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Congressional Budget Office Page 2 of 11 3/20/2010
Table 5. Estimate of the Effects of Non-Coverage Health Provisions of the Reconciliation Proposal 

Combined with H.R. 3590 as Passed by the Senate

Estimated effects on direct spending and revenues in billions of dollars, by fiscal year

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Change 

from 

H.R. 3590a

Subtitle K—Protections for American Indians and Alaska Natives

 2901 Special Rules Relating to Indians

No Cost Sharing for Indians with Income at or Below 300 Percent of Poverty Enrolled in Coverage Through a State Exchange Included in estimate for expanding health insurance coverage.

Payer of Last Resort 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Facilitating Enrollment of Indians Through the Express Lane Option 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 2902 Elimination of Sunset for Reimbursement for All Medicare Part B Services 

Furnished by Certain Indian Hospitals and Clinics 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.0

Indian Health Improvement Act 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle L—Maternal and Child Health Services 

2951 Maternal, Infant, and Early Childhood Home Visiting Programs 0.0 0.1 0.3 0.4 0.4 0.2 0.1 0.0 0.0 0.0 1.2 1.5 0.0

2952 Support, Education, and Research for Postpartum Depression 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

2953 Personal Responsibility Education 0.0 0.0 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.3 0.4 0.0

2954 Restoration of Funding for Abstinence Education 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0

2955 Inclusion of Information About The Importance of Having a Health-Care 

Power of Attorney in Transition Planning for Children Aging Out of 

Foster Care and Independent Living Programs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Support for Pregnant and Parenting Teens and Women 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.0

TITLE III—IMPROVING THE QUALITY AND EFFICIENCY OF HEALTH CARE

Subtitle A—Transforming the Health Care Delivery System

PART I—LINKING PAYMENT TO QUALITY OUTCOMES UNDER THE MEDICARE PROGRAM

 3001 Hospital Value-Based Purchasing Program 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3002 Physician Quality Reporting System

 PPO Stabilization Fund 0.0 0.0 0.0 0.0 -0.1 0.0 0.0 0.0 0.0 0.0 -0.1 -0.2 0.0

 Physicians' Services 0.0 0.0 0.2 0.2 0.2 0.3 -0.1 -0.2 -0.2 -0.2 0.6 0.3 0.0

 3003 Improvements to the Physician Feedback Program 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3004 Quality Reporting for Long-Term Care Hospitals, Inpatient Rehabilitation 

Hospitals, and Hospice Programs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.0

 3005 Quality Reporting for PPS-Exempt Cancer Hospitals 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3006 Plans for a Value-Based Purchasing Program for Skilled Nursing 

Facilities and Home Health Agencies 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3007 Value-based Payment Modifier Under the Physician Fee Schedule 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3008 Payment Adjustment for Conditions Acquired in Hospitals 0.0 0.0 0.0 0.0 0.0 -0.2 -0.3 -0.3 -0.3 -0.3 0.0 -1.4 0.0

PART II—NATIONAL STRATEGY TO IMPROVE HEALTH CARE QUALITY

 3011 National Strategy 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3012 Interagency Working Group on Health Care Quality 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3013 Quality Measure Development 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3014 Quality Measurement 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0

 3015 Data Collection; Public Reporting 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Effect of Quality-Measure Development/Endorsement Provisions 

on Medicare Spending 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Congressional Budget Office Page 3 of 11 3/20/2010
Table 5. Estimate of the Effects of Non-Coverage Health Provisions of the Reconciliation Proposal 

Combined with H.R. 3590 as Passed by the Senate

Estimated effects on direct spending and revenues in billions of dollars, by fiscal year

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Change 

from 

H.R. 3590a

PART III—ENCOURAGING DEVELOPMENT OF NEW PATIENT CARE MODELS

 3021 Establishment of Center for Medicare and Medicaid Innovation 0.0 0.1 0.2 0.2 0.2 0.2 0.0 -0.3 -0.7 -1.2 0.7 -1.3 0.0

 3022 Medicare Shared Savings Program 0.0 0.0 0.0 -0.1 -0.3 -0.6 -0.7 -0.9 -1.0 -1.2 -0.5 -4.9 0.0

 3023 National Pilot Program on Payment Bundling 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3024 Independence at Home Demonstration Program 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3025 Hospital Readmissions Reduction Program 0.0 0.0 0.0 -0.1 -0.3 -1.1 -1.3 -1.3 -1.4 -1.5 -0.5 -7.1 0.0

 3026 Community-Based Care Transitions Program 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.3 0.5 0.0

 3027 Extension of Gainsharing Demonstration 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle B—Improving Medicare for Patients and Providers

PART I—ENSURING BENEFICIARY ACCESS TO PHYSICIAN CARE AND OTHER SERVICES

 3101 Increase in the Physician Payment Update 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3102 Extension of the Work Geographic Index Floor and Revisions to the 

Practice Expense Geographic Adjustment Under the 

Medicare Physician Fee Schedule 0.9 1.0 0.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 2.2 2.2 0.4

 3103 Extension of Exceptions Process for Medicare Therapy Caps 0.3 0.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.8 0.8 0.0

 3104 Extension of Payment for Technical Component of Certain 

Physician Pathology Services 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0

 3105 Extension of Ambulance Add-Ons 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0

 3106 Extension of Certain Payment Rules for Long-Term Care Hospital 

Services and of Moratorium on the Establishment of 

Certain Hospitals and Facilities 0.0 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.2 0.0

 3107 Extension of Physician Fee Schedule Mental Health Add-On 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3108 Permitting Physician Assistants to Order Post-Hospital 

Extended Care Services 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3109 Exemption of Certain Pharmacies From Accreditation Requirements 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3110 Part B Special Enrollment Period for Disabled TRICARE Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3111 Payment for Bone Density Tests 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0

 3112 Revision to the Medicare Improvement Fund 0.0 0.0 0.0 0.0 -15.6 -5.2 0.0 0.0 0.0 0.0 -15.6 -20.7 0.0

 3113 Treatment of Certain Complex Diagnostic Laboratory Tests 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0

 3114 Improved Access for Certified-Midwife Services 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Congressional Budget Office Page 4 of 11 3/20/2010
Table 5. Estimate of the Effects of Non-Coverage Health Provisions of the Reconciliation Proposal 

Combined with H.R. 3590 as Passed by the Senate

Estimated effects on direct spending and revenues in billions of dollars, by fiscal year

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Change 

from 

H.R. 3590a

PART II—RURAL PROTECTIONS

 3121 Extension of Outpatient Hold Harmless Provision 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.2 0.0

 3122 Reasonable Costs Payments for Certain Clinical Diagnostic Laboratory 

Tests Furnished to Hospital Patients in Certain Rural Areas 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3123 Extension of the Rural Community Hospital Demonstration Program 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3124 Extension of the Medicare-Dependent Hospital (MDH) Program 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3125 Payment Adjustment for Low-Volume Hospitals 0.0 0.0 0.1 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.0

 3126 Demonstration Project on Community Health Integration Models 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3127 Study on Adequacy of Medicare Payments in Rural Areas 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3128 Technical Correction Related to Critical Access Hospital Services 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3129 Medicare Rural Hospital Flexibility Program 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

PART III—IMPROVING PAYMENT ACCURACY

 3131 Payment Adjustments for Home Health Care (includes effect 

of section 3401) 0.0 -0.4 -0.8 -1.1 -1.9 -3.3 -5.3 -7.5 -9.0 -10.3 -4.2 -39.7 0.0

 3132 Hospice Reform 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.0

 3133 Medicare Disproportionate Share Hospital (DSH) Payments 0.0 0.0 0.0 0.0 0.0 -3.6 -4.0 -5.0 -4.4 -5.1 0.0 -22.1 3.0

 3134 Misvalued Codes Under the Physician Fee Schedule 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3135 Equipment Utilization Factor for Advanced Imaging Services 0.0 -0.1 -0.2 -0.2 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.9 -2.3 -1.2

 3136 Revision of Payment for Power-Driven Wheelchairs 0.0 -0.4 -0.1 0.0 0.0 0.0 0.0 -0.1 -0.1 -0.1 -0.6 -0.8 0.0

 3137 Hospital Wage Index Improvement 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.3 0.0

 3138 Treatment of Certain Cancer Hospitals 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3139 Payment for Biosimilar Biological Products Included in estimate for title VII, subtitle A.

 3140 Medicare Hospice Concurrent Care Demonstration Program 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3141 Application of Budget Neutrality on a National Basis in the 

Calculation of the Medicare Hospital Wage Index Floor 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3142 HHS Study on Urban Medicare-Dependent Hospitals 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle C—Provisions Relating to Part C

 3201 Medicare Advantage Payments 0.0 -1.8 -6.0 -9.4 -13.1 -16.7 -19.2 -21.3 -23.2 -25.0 -30.3 -135.6 -17.5

 3202 Benefit protection and simplification 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3203 Repealed 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.7

 3204 Simplification of Annual Beneficiary Election Periods 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3205 Extension for Specialized MA Plans for Special Needs Individuals 0.0 0.1 0.2 0.2 0.2 0.0 0.0 0.0 0.0 0.0 0.6 0.7 -0.2

 3206 Extension of Reasonable Cost Contracts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3207 Technical Correction to MA Private Fee-for-Service Plans 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0

 3208 Making Senior Housing Facility Demonstration Permanent Included in estimate for section 3205.

3209 Authority to Deny Plan Bids Included in estimate for section 3201.

3210 Development of New Standards for Certain Medigap Plans 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.0

Congressional Budget Office Page 5 of 11 3/20/2010
Table 5. Estimate of the Effects of Non-Coverage Health Provisions of the Reconciliation Proposal 

Combined with H.R. 3590 as Passed by the Senate

Estimated effects on direct spending and revenues in billions of dollars, by fiscal year

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Change 

from 

H.R. 3590a

Subtitle D—Medicare Part D Improvements for Prescription Drug Plans and MA–PD Plans

 3301 Medicare Coverage Gap Discount Program 0.2 2.4 1.6 2.1 2.9 3.8 5.2 6.4 7.6 10.4 9.2 42.6 24.8

 3302 Determination of Medicare Part D Low-Income Benchmark Premium 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.7 0.0

 3303 Voluntary de minimis Policy for Subsidy Eligible Individuals Under 

Prescription Drug Plans and MA–PD Plans 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.4 0.0

 3304 Special Rule for Widows and Widowers Regarding Eligibility 

for Low-Income Assistance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.2 0.0

 3305 Improved Information for Subsidy Eligible Individuals Reassigned to 

Prescription Drug Plans and MA–PD Plans 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3306 Funding Outreach and Assistance for Low-Income Programs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3307 Improving Formulary Requirements for Prescription Drug Plans and MA–PD 

Plans With Respect to Certain Categories or Classes of Drugs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3308 Reducing Part D Premium Subsidy for High-Income Beneficiaries 0.0 -0.3 -0.5 -0.7 -0.9 -1.1 -1.3 -1.6 -2.0 -2.4 -2.4 -10.7 0.0

 3309 Elimination of Cost Sharing for Certain Dual Eligible Individuals. 0.0 0.0 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.3 1.1 0.0

 3310 Reducing Wasteful Dispensing of Outpatient Prescription Drugs in 

Long-Term Care Facilities 0.0 0.0 -0.1 -0.3 -0.5 -0.8 -1.0 -1.0 -0.9 -1.1 -1.0 -5.7 0.0

 3311 Medicare Prescription Drug Plan and MA–PD Plan Complaint System 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3312 Uniform Exceptions and Appeals Process for Prescription Drug Plans 

and MA–PD Plans 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3313 Office of the Inspector General Studies and Reports 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 3314 Including Costs Incurred by AIDS Drug Assistance Programs and 

Indian Health Service in Providing Prescription Drugs Toward the 

Annual Out-of-Pocket Threshold Under Part D 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.6 0.0

 3315 Immediate Reduction in Coverage Gap in 2010 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10328 Improvement in Part D Medication Therapy Management Programs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle E—Ensuring Medicare Sustainability

 3401 Revision of Certain Market Basket Updates and Incorporation of services 

Productivity Improvements into Market Basket Updates that do not 

Already Incorporate Such Improvements (effect of productivity adjustment 

for home health included in estimate for section 3131) -0.1 -1.1 -3.8 -7.4 -11.3 -15.3 -19.5 -25.4 -32.3 -40.5 -23.7 -156.6 -9.9

 3402 Temporary Adjustment to the Calculation of Part B Premiums 0.0 -1.3 -1.9 -1.9 -2.5 -2.6 -2.8 -3.2 -4.0 -4.9 -7.5 -25.0 0.0

 3403 Independent Payment Advisory Board 0.0 0.0 0.0 0.0 0.0 -1.5 -2.6 -3.0 -3.7 -4.7 0.0 -15.5 12.6

Subtitle F—Health Care Quality Improvements 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10323 Medicare Coverage for Individuals Exposed to 

Environmental Health Hazards 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.3 0.0

10324 Protections for Frontier States 0.0 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.8 2.0 0.0

10325 Revision to Skilled Nursing Facility Prospective Payment System 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10326 Pilot Testing of Pay-for-Performance 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10329 Methodology to Assess Health Plan Value 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10330 Modernizing CMS Computer and Data Systems 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10331 Public Reporting of Performance Information 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10332 Availability of Medicare Data 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10333 Community-based Collaborative Care Networks 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Congressional Budget Office Page 6 of 11 3/20/2010
Table 5. Estimate of the Effects of Non-Coverage Health Provisions of the Reconciliation Proposal 

Combined with H.R. 3590 as Passed by the Senate

Estimated effects on direct spending and revenues in billions of dollars, by fiscal year

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Change 

from 

H.R. 3590a

TITLE IV—PREVENTION OF CHRONIC DISEASE AND IMPROVING PUBLIC HEALTH 

Subtitle A—Modernizing Disease Prevention and Public Health Systems 

 4002 Prevention and Public Health Fund 0.1 0.6 0.8 1.0 1.3 1.6 1.8 1.9 2.0 2.0 3.7 12.9 0.0

Sections 4001, 4003, 4004 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle B—Increasing Access to Clinical Preventive Services 

 4101 School-Based Health Centers 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.2 0.0

 4102 Oral Healthcare Prevention Activities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 4103 Medicare Coverage of Annual Wellness Visit Providing a 

Personalized Prevention Plan 0.0 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.5 0.5 1.4 3.6 0.0

 4104 Removal of Barriers to Preventive Services in Medicare 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.8 0.0

 4105 Evidence-Based Coverage of Preventive Services in Medicare 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.3 -0.7 0.0

 4106 Improving Access to Preventive Services for Eligible Adults in Medicaid 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0

 4107 Coverage of Comprehensive Tobacco Cessation Services for 

Pregnant Women in Medicaid 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.0

 4108 Incentives for Prevention of Chronic Diseases in Medicaid 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0

Subtitle C—Creating Healthier Communities 

 4201 Community Transformation Grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 4202 Healthy Aging, Living Well; Evaluation of Community-Based Prevention 

and Wellness Programs for Medicare Beneficiaries 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0

 4203 Removing Barriers and Improving Access to Wellness for 

Individuals With Disabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 4204 Immunizations 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 4205 Nutrition Labeling of Standard Menu Items at Chain Restaurants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 4206 Demonstration Project Concerning Individualized Wellness Plan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 4207 Reasonable Break Time for Nursing Mothers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle D—Support for Prevention and Public Health Innovation 

 4301 Research On Optimizing The Delivery of Public Health Services 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 4302 Understanding Health Disparities: Data Collection and Analysis

Data Collection, Analysis, and Quality 0.0 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.2 0.0

Addressing Health Care Disparities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 4303 CDC and Employer-Based Wellness Programs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 4304 Epidemiology-Laboratory Capacity Grants 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 4305 Advancing Research and Treatment for Pain-Care Management 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 4306 Funding for Childhood Obesity Demonstration Project 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10407 Better Diabetes Care 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10408 Grants for Workplace Wellness 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10409 Cures Acceleration Network 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10410 Centers of Excellence for Depression 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10411 Programs Relating to Congenital Heart Disease 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10412 Automated Defribrillation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10413 Young Women's Breast Health 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle E—Miscellaneous Provisions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Congressional Budget Office Page 7 of 11 3/20/2010
Table 5. Estimate of the Effects of Non-Coverage Health Provisions of the Reconciliation Proposal 

Combined with H.R. 3590 as Passed by the Senate

Estimated effects on direct spending and revenues in billions of dollars, by fiscal year

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Change 

from 

H.R. 3590a

TITLE V—HEALTH CARE WORKFORCE

Subtitle A—Purpose and Definitions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle B—Innovations in the Health Care Workforce 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle C—Increasing the Supply of the Health Care Workforce 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle D—Enhancing Health Care Workforce Education and Training

Sections 5301-5314 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 5315 United States Public Health Sciences Track Included in estimate for section 4002.

5316 Family Nurse Practitioner Training Programs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle E—Supporting the Existing Health Care Workforce 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle F—Strengthening Primary Care and Other Workforce Improvements

 5501 Expanding Access to Primary Care Services and General Surgery Services 0.0 0.4 0.6 0.7 0.7 0.8 0.3 0.0 0.0 0.0 2.5 3.5 0.0

 5502 Medicare Federally Qualified Health Center Improvements 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.0 0.4 0.0

 5503- 5506 Medicare Graduate Medical Education Policies 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.3 1.1 0.0

 5507 Demonstration Projects to Address Health Professions Workforce Needs and 

Extension of Family-To-Family Health Information Centers 0.0 0.1 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.4 0.4 0.0

 5508 Increasing Teaching Capacity 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.2 0.0

 5509 Graduate Nurse Education Demonstration Program 0.0 0.0 0.0 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.1 0.2 0.0

Subtitle G—Improving Access to Health Care Services 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

5707 Infrastructure to Expand Access to Care 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0

5606 State Grants to Health Care Providers 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Medical Training in Underserved Communities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Preventive Medicine and Public Health Training Program 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Scholarship and Loan program 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

5708 Community Health Centers and the National Health Service Corps Fund 0.0 0.7 2.2 1.8 2.3 3.3 1.8 0.2 0.0 0.0 7.0 12.3 2.5

5709 Demonstration Project to Provide Access to Affordable Care 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle H—General Provisions 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

TITLE VI—TRANSPARENCY AND PROGRAM INTEGRITY

Subtitle A—Physician Ownership and Other Transparency

 6001 Limitation on Medicare Exception to the Prohibition on Certain 

Physician Referrals for Hospitals 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.5 0.1

 6002 Reporting of Physician Ownership or Investment Interests 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 6003 Disclosure Requirements for In-Office Ancillary Services Exception to the 

Prohibition on Physician Self-Referral for Certain Imaging Services 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 6004 Prescription Drug Sample Transparency 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 6005 Pharmacy Benefit Managers Transparency Requirements 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Congressional Budget Office Page 8 of 11 3/20/2010
Table 5. Estimate of the Effects of Non-Coverage Health Provisions of the Reconciliation Proposal 

Combined with H.R. 3590 as Passed by the Senate

Estimated effects on direct spending and revenues in billions of dollars, by fiscal year

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Change 

from 

H.R. 3590a

Subtitle B—Nursing Home Transparency and Improvement 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle C—Nationwide Program for National and State Background Checks on Direct 

Patient Access Employees of Long-term Care Facilities and Providers 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0

Subtitle D—Patient-Centered Outcomes Research

6301 Patient-Centered Outcomes Research

 Medicare 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 -0.2 0.1 -0.3 0.0

 Non-Medicare 0.0 0.0 0.1 0.1 0.2 0.3 0.4 0.4 0.4 0.5 0.4 2.5 0.0

6302 Federal Coordinating Council for Comparative Effectiveness Research 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle E—Medicare, Medicaid, and CHIP Program Integrity Provisions

 6401 Provider Screening and Other Enrollment Requirements Under 

Medicare, Medicaid, and CHIP 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.0

 6402 Enhanced Medicare and Medicaid Program Integrity Provisions 0.0 -0.2 -0.3 -0.3 -0.3 -0.3 -0.4 -0.4 -0.4 -0.4 -1.1 -2.9 0.3

 6403 Elimination of Duplication Between the Healthcare Integrity and 

Protection Data Bank and the National Practitioner Data Bank 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 6404 Maximum Period for Submission of Medicare Claims 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 6405 Physicians Who Order Items or Services Required to Be 

Medicare-Enrolled Physicians or Eligible Professionals 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.2 -0.4 0.0

 6406 Requirement for Physicians to Provide Documentation on Referrals 

to Programs At High Risk of Waste and Abuse 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 6407 Face to Face Encounter With Patient Required Before Physicians May 

Certify Eligibility for Home Health Services or 

Durable Medical Equipment Under Medicare 0.0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.2 -0.3 -1.0 0.0

 6408 Enhanced Penalties 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 6409 Medicare Self-Referral Disclosure Protocol 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 6410 Adjustments to the Competitive Acquisition Program in Medicare for 

Durable Medical Equipment, Prosthetics, Orthotics, and Supplies 0.0 0.0 0.0 -0.1 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.3 -1.4 0.0

6411 Expansion of the Recovery Audit Contractor (RAC) Program 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10606 Health Care Fraud Enforcement 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle F—Additional Medicaid Program Integrity Provisions

 6501 Termination of Provider Participation Under Medicaid If 

Terminated Under Medicare or Other State Plan 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 6502 Medicaid Exclusion From Participation Relating to Certain Ownership, 

Control, and Management Affiliations 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 6503 Billing Agents, Clearinghouses, or Other Alternate Payees 

Required to Register Under Medicaid 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 6504 Requirement to Report Expanded Set of Data Elements Under MMIS 

to Detect Fraud and Abuse 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 6505 Prohibition on Payments to Institutions or Entities 

Located Outside of the United States 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 6506 Overpayments 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.0

6507 Mandatory State Use of National Correct Coding Initiative 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 -0.1 -0.3 0.0

6508 General Effective Date 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Congressional Budget Office Page 9 of 11 3/20/2010
Table 5. Estimate of the Effects of Non-Coverage Health Provisions of the Reconciliation Proposal 

Combined with H.R. 3590 as Passed by the Senate

Estimated effects on direct spending and revenues in billions of dollars, by fiscal year

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Change 

from 

H.R. 3590a

Subtitle G—Additional Program Integrity Provisions 0.0

10607 State Demonstration Programs: Alternatives to Tort Litigation 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10608 Liability Coverage in Free Clinics 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0

10609 FDA Labeling Changes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.1 0.0

Subtitle H—Elder Justice Act 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Subtitle I—Sense of the Senate Regarding Medical Malpractice 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

TITLE VII—IMPROVING ACCESS TO INNOVATIVE MEDICAL THERAPIES

Subtitle A—Biologics Price Competition and Innovation 0.0 0.0 0.0 0.0 -0.1 -0.3 -0.7 -1.2 -1.9 -2.7 -0.1 -7.0 0.1

Subtitle B—More Affordable Medicines for Children and Underserved Communities

 7101 Expanded Participation in 340B Program Included in estimate for section 2501.

 7102 Improvements to 340B Program Integrity 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

 7103 GAO Study to Make Recommendations on Improving the 340B Program 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

TITLE VIII—COMMUNITY LIVING ASSISTANCE SERVICES AND SUPPORTS 0.0 0.0 -5.4 -8.8 -10.0 -11.3 -11.1 -9.1 -7.6 -7.0 -24.1 -70.2 0.0

TITLE IX—REVENUE PROVISIONS Estimates provided by the Joint Committee on Taxation in a Separate Table (see JCX-17-10).

PROVISIONS OF RECONCILIATION BILL THAT ARE NOT INCLUDED IN 

ESTIMATES FOR PROVISIONS OF H.R. 3590

1005 Administrative Funding 0.0 0.4 0.5 0.1 0.0 0.0 0.0 0.0 0.0 0.0 1.0 1.0 1.0

1109 Payment for Qualifying Hospitals 0.1 0.3 0.0 0.4 0.4 0.4

1202 Improving Payments to Primary Care Practitioners 0.0 0.0 0.0 1.9 3.0 1.6 0.9 0.8 0.1 0.0 4.9 8.3 8.3

1206 Drug Rebates for New Formulations of Existing Drugs 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.6 0.6

1301, 1302, 1304 Program Integrity Provisions: Sections 1301, 1302,1304 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.3 -0.9 -0.9

1305 Increased Funding to Fight Fraud, Waste, and Abuse Included in estimate for section 6402. 0.0

1501 Community College and Career Training Grant Program 0.0 0.0 0.4 0.5 0.5 0.5 0.1 0.0 0.0 0.0 1.3 2.0 2.0

2303 Drugs Purchased by Covered Entities 0.1 0.2 0.2 0.2 0.2 0.3 0.3 0.3 0.4 0.4 0.8 2.5 2.5

INTERACTIONS

Medicare Advantage Interactions 0.0 0.0 -0.6 -1.9 -7.9 -7.8 -8.9 -11.7 -14.1 -17.2 -10.4 -70.3 -52.9

Premium Interactions 0.0 -0.2 0.5 1.1 6.3 4.8 4.8 6.0 7.0 8.1 7.6 38.4 6.8

Medicare Part D Interactions with Medicare Advantage Provisions 0.0 0.0 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.3 0.4 1.5 -1.5

Medicare Part B Interactions with Medicare Part D Provisions 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.8 0.0

Medicaid Interactions with Medicare Part D Provisions 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.2 0.1 0.7 0.0

Medicare Interaction with 340b 0.0 0.0 0.0 0.0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.5 0.0

TRICARE Interaction 0.0 0.0 -0.1 -0.2 -0.3 -0.4 -0.6 -0.8 -1.0 -1.2 -0.5 -4.4 -0.9

FEHB Interaction (on-budget) 0.0 0.0 0.0 0.0 0.2 0.3 0.3 0.4 0.8 0.9 0.3 2.9 0.1

FEHB Interaction (off-budget) 0.0 0.0 0.0 0.0 0.2 0.2 0.2 0.1 0.3 0.3 0.3 1.3 -0.2

Total, Changes in On-Budget Direct Spending 3.0 3.0 -10.7 -22.0 -47.5 -55.7 -66.6 -83.2 -99.1 -114.7 -74.1 -493.3 -13.7

Total, Changes in Unified-Budget Direct Spending 3.0 3.0 -10.6 -22.0 -47.3 -55.5 -66.4 -83.1 -98.9 -114.4 -73.8 -492.0 -13.9

Congressional Budget Office Page 10 of 11 3/20/2010
Table 5. Estimate of the Effects of Non-Coverage Health Provisions of the Reconciliation Proposal 

Combined with H.R. 3590 as Passed by the Senate

Estimated effects on direct spending and revenues in billions of dollars, by fiscal year

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Change 

from 

H.R. 3590a

Changes in Revenues 

Transitional Reinsurance - Collections for Early Retirees 0.0 0.0 0.0 0.0 1.5 1.5 0.8 0.0 0.0 0.0 1.5 3.8 0.0

Fraud, Waste, and Abuse (on-budget) 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.4 0.9 0.0

Effect of Administrative Simplification on Revenuesb

0.0 -0.2 -0.2 0.0 0.5 0.9 1.3 1.9 2.0 2.0 0.1 8.2 0.0

Effect on Revenues of Changes in Health Insurance Premiums 

as a Result of Comparative Effectiveness Research, Changes in 

the Medicaid Drug Program, Biosimilar Biological Products, 

and FDA Labeling 

 Income and Medicare payroll taxes (on-budget) 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.2 0.3 0.3 0.1 1.0 0.0

 Social Security payroll taxes (off-budget) 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.2 0.0 0.5 0.0

Total, Changes in Unified-Budget Revenuesc

0.0 -0.1 -0.1 0.2 2.1 2.6 2.4 2.2 2.5 2.6 2.1 14.3 0.0

Total, Changes in Unified-Budget Deficitsc

3.0 3.1 -10.6 -22.1 -49.4 -58.1 -68.7 -85.3 -101.4 -117.0 -75.9 -506.4 -13.9

Memorandum

Non-scoreable Effects

 Savings from HCFAC and Medicaid Integrity Spending 0.0 -0.1 -0.1 -0.2 -0.2 -0.2 -0.3 -0.3 -0.4 -0.4 -0.5 -2.1

 Recovery Audit Contractor (RAC) Program in Medicaid 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -0.2

Notes: AIDS = Acquired Immune-Deficiency Syndrome; CDC = Center for Disease Control and Prevention; CHIP = Children's Health Insurance Program; CMS = Centers for Medicare & Medicaid Services;

FMAP = federal medical assistance percentage; FDA = Food and Drug Administration; FEHB = Federal Employees Health Benefits program; GAO = Government Accountability Office; 

HCFAC = Health Care Fraud and Abuse Control; HHS = Department of Health and Human Services; MA = Medicare Advantage; MA-PD = Medicare Advantage prescription drug plan; 

MMIS = Medicaid Management Information System; PPO = preferred provider organization; PPS = prospective payment system; TRICARE is the health plan operated by the Department of Defense.

a. Incremental effects over the 2010-2019 period of health provisions of the reconciliation proposal relative to H.R. 3590 as passed by the Senate.

b. Includes both on and off-budget revenues.

c. The revenue effects of the provisions of title IX are estimated by the Joint Committee on Taxation, and are not included in this table.

Congressional Budget Office Page 11 of 11 3/20/2010
Table 6. Estimate of the Incremental Effects of the Health and Revenue Provisions of the Reconciliation Proposal

Relative to H.R. 3590 as Passed by the Senate

Estimated effects on direct spending and revenues in billions of dollars, by fiscal year

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Changes in Deficits

TITLE I—COVERAGE, MEDICARE, MEDICAID, AND REVENUES

Subtitle A—Coverage (direct spending and revenues)

Coverage Provisions (sections 1001-1004, 1201, and 1401) 0 0.2 0.3 5.9 14.2 17.4 21.6 30.2 35.0 35.6 20.6 160.4

1005 Implementation Funding 0 0.4 0.5 0.1 0 0 0 0 0 0 1.0 1.0

Subtitle B—Medicare (direct spending)

1101 Closing the Medicare Prescription Drug ‘‘Donut Hole’’ 0.2 1.5 -0.3 0.7 1.3 2.0 3.0 4.1 5.0 7.2 3.5 24.8

1102 Medicare Advantage Payments 0 4.2 1.0 1.4 -1.8 -4.4 -5.2 -4.5 -4.2 -3.4 4.8 -17.0

1103 Savings from Limits on MA Plan Administrative Costs Interacts with section 1102; budgetary effects are included in estimate for that section.

1104 Disproportionate Share Hospital (DSH) Payments 0 0 0 0 * 0.2 0.5 0.7 0.7 0.9 * 3.0

1105 Market Basket Updates 0 0 0 0 -0.2 -0.2 -0.4 -1.6 -3.0 -4.5 -0.2 -9.8

1106 Physician Ownership-Referral * * * * * * * * * * * 0.1

1107 Payment for Imaging Services 0 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.2 -0.2 -0.5 -1.2

1108 Practice Expense Geographic Practice Cost Index Adjustment for 2010 0.3 0.2 0 0 0 0 0 0 0 0 0.4 0.4

1109 Payment for Qualifying Hospitals 0 0.1 0.3 * 0 0 0 0 0 0 0.4 0.4

Subtitle C—Medicaid (direct spending)

1201 Federal Funding for States Included in coverage estimate.

1202 Payments to Primary Care Physicians 0 0 0 1.9 3.0 1.6 0.9 0.8 0.1 0 4.9 8.3

1203 Disproportionate Share Hospital Payments 0 0 * * -0.5 2.2 3.0 2.0 -1.1 -1.6 -0.4 4.1

1204 Funding for the Territories 0 0.2 0.5 0.6 0.2 0.1 0.1 0.1 0.1 0.1 1.5 2.0

1205 Delay in Community First Choice Option 0 -0.1 -0.1 -0.1 -0.3 -0.1 * -0.1 * -0.1 -0.6 -0.9

1206 Drug Rebates for New Formulations of Existing Drugs * 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.6

Subtitle D—Reducing Fraud, Waste, and Abuse (direct spending)

1301 Community Mental Health Centers 0 * -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.2 -0.6

1302 Medicare Prepayment Medical Review Limitations 0 0 * * * * * * * * * -0.1

1303 Funding to Fight Fraud, Waste, and Abuse 0 0.1 0.1 * * * * * * * 0.2 0.3

1304 90-Day Period of Enhanced Oversight for Initial Claims of DME Suppliers 0 * * * * * * * * * -0.1 -0.2

Subtitle E—Revenues (direct spending and revenues)a

1.9 -2.6 -2.3 -7.7 -23.0 -15.3 -24.1 -26.6 -27.8 -28.7 -33.6 -155.9

Subtitle F—Community College and Career Training Grant Program (direct spending) 0 * 0.4 0.5 0.5 0.5 0.1 * 0 0 1.3 2.0

Congressional Budget Office Page 1 of 2 3/20/2010
Table 6. Estimate of the Incremental Effects of the Health and Revenue Provisions of the Reconciliation Proposal

Relative to H.R. 3590 as Passed by the Senate

Estimated effects on direct spending and revenues in billions of dollars, by fiscal year

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

INTERACTIONS (direct spending)

Effect of Coverage Provisions on Medicare/Medicaid/CHIP Spending * -0.2 -0.1 * * -0.2 -0.2 -0.4 -0.1 -0.1 -0.4 -1.3

Medicare Advantage Interactions 0 0 -0.2 -0.9 -6.1 -5.9 -6.5 -8.9 -11.1 -13.3 -7.1 -52.9

Premium Interactions 0 -0.4 -0.1 -0.1 1.1 1.0 1.1 1.2 1.4 1.5 0.5 6.8

IPAB Interactions 0 0 0 0 0 * 1.5 2.6 3.9 4.6 0 12.6

TRICARE Interaction 0 * * * -0.1 -0.1 -0.1 -0.2 -0.2 -0.3 -0.1 -0.9

FEHB Interaction (off-budget) 0 * -0.1 -0.1 0.1 * -0.1 -0.1 * * -0.1 -0.2

Subtotal, Title I Changes in Unified-Budget Deficits 2.4 3.6 -0.2 2.2 -11.9 -1.3 -4.8 -0.8 -1.4 -2.3 -3.8 -14.4

TITLE II—HEALTH, EDUCATION, LABOR, AND PENSIONS

Subtitle A—Education (direct spending) See Table 7.

Subtitle B—Health (direct spending and revenues)

2301 Insurance Reforms 0 0.3 0.4 0.3 0.7 0.6 0.5 0.4 0.4 0.3 1.6 3.8

2302 Drugs Purchased by Covered Entities 0.1 0.2 0.2 0.2 0.2 0.3 0.3 0.3 0.4 0.4 0.8 2.5

2303 Community Health Centers 0 0.2 0.3 0.4 0.5 0.6 0.3 * 0 0 1.5 2.5

Subtotal, Title II Subtitle B Changes in Unified-Budget Deficits 0.1 0.6 0.9 0.9 1.4 1.6 1.1 0.8 0.7 0.7 3.9 8.7

Total Changes in Unified-Budget Deficits

 for Title I and Subtitle B of Title II 2.5 4.2 0.7 3.1 -10.4 0.3 -3.7 -0.1 -0.7 -1.6 0.1 -5.7

Sources: Congressional Budget Office and staff of the Joint Committee on Taxation

Notes: * = between -$50 million and $50 million. Negative numbers indicate reductions in the deficit.

CHIP = Children's Health Insurance Program; DME = durable medical equipment; FEHB = Federal Employees Health Benefits program; 

IPAB = Independent Payment Advisory Board; MA = Medicare Advantage; TRICARE is the health plan operated by the Department of Defense.

a. Estimated effects on the deficit of section 1401 (High-cost plan excise tax) are included in the estimate for coverage provisions in Title I, Subtitle A.

Congressional Budget Office Page 2 of 2 3/20/2010
Table 7. Estimate of the Incremental Effects of the Reconciliation Proposal, Relative to H.R. 3590 as Passed by the Senate

Includes effects of education provisions as well as health care and revenue provisions

Billions of Dollars, by Fiscal Year

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Title I - Coverage, Medicare, Medicaid, and Revenuesa

Subtotal, Title I 2.4 3.6 -0.2 2.2 -11.9 -1.3 -4.8 -0.8 -1.4 -2.3 -3.8 -14.4

 On-Budget 2.4 3.5 -0.2 -1.2 -12.6 -3.6 -8.2 -5.1 -5.3 -6.3 -8.1 -36.6

 Off-Budgetb

0 0.1 0.1 3.4 0.7 2.3 3.4 4.3 3.9 4.0 4.3 22.2

Title II - Health, Education, Labor, and Pensions

Subtitle A - Education -0.3 -0.4 3.7 -5.6 -2.5 -4.5 -3.6 -2.4 -1.8 -1.7 -5.1 -19.2

Subtitle B - Health 0.1 0.6 0.9 0.9 1.4 1.6 1.1 0.8 0.7 0.7 3.9 8.7

Subtotal, Title II -0.3 0.2 4.6 -4.6 -1.1 -3.0 -2.5 -1.7 -1.0 -1.0 -1.2 -10.5

 On-Budget -0.3 0.1 4.5 -4.7 -1.3 -3.2 -2.7 -1.8 -1.1 -1.1 -1.7 -11.7

 Off-Budgetb

0 0.1 0.1 0.1 0.2 0.2 0.2 0.1 0.1 0.1 0.5 1.2

Net Increase or Decrease (-) in the Deficit 2.2 3.8 4.4 -2.5 -12.9 -4.2 -7.3 -2.5 -2.4 -3.4 -5.0 -24.9

On-Budget 2.2 3.6 4.2 -5.9 -13.9 -6.8 -10.9 -6.9 -6.4 -7.4 -9.8 -48.3

Off-Budgetb

0 0.2 0.2 3.5 0.9 2.6 3.6 4.4 4.0 4.1 4.8 23.4

Sources: Congressional Budget Office and the staff of the Joint Committee on Taxation.

Notes: Components may not sum to totals because of rounding.

a. Also includes funding for Community College and Career Training Grant Program. 

b. Off-budget effects include changes in Social Security spending and revenues as well as spending by the U.S. Postal Service.

INCREASE OR DECREASE (-) IN THE DEFICIT FROM CHANGES IN DIRECT SPENDING OR REVENUES

Congressional Budget Office Page 1 of 1 3/20/2010
JOINT 

Provision Effective 2010 2011 2012 2013 2014 2015 2016 2017 

I. Revenue Provisions

1. 40% excise tax on health coverage in excess of

$10,200/$27,500 (subject to adjustment for unexpected increase in medical costs prior to effective date) and increased thresholds of

$1,650/$3,450 for over age 55 retirees or certain high-risk professions, both indexed for inflation by CPI-U plus 1%; adjustment based on age and gender profile of employees; vision and dental

ESTIMATED REVENUE EFFECTS OF THE AMENDMENT IN THE NATURE OF A SUBSTITUTE TO 

H.R. 4872, THE “RECONCILIATION ACT OF 2010,” AS AMENDED, 

Fiscal Years 2010 - 2019

[Billions of Dollars] 

H.R. 3590, THE "PATIENT PROTECTION AND AFFORDABLE CARE ACT ('PPACA')," AS PASSED BY THE SENATE

 IN COMBINATION WITH THE REVENUE EFFECTS OF 

SCHEDULED FOR CONSIDERATION BY THE HOUSE COMMITTEE ON RULES ON MARCH 20, 2010 

excluded from excise tax; levied at insurer level;employer aggregates and issues information returnfor insurers indicating amount subject to the excise tax; nondeductible [1] ................................................ tyba 12/31/17 --- --- --- --- --- --- --- --- 

2. Employer W-2 reporting of value of health 

benefits ...................................................................... tyba 12/31/10

3. Conform the definition of medical expenses for 

health savings accounts, Archer MSAs, health flexible spending arrangements, and health reimbursement arrangements to the definition of

the itemized deduction for medical expenses (excluding over-the-counter medicines prescribed by a physician) [1] ..................................................... tyba 12/31/10 --- 0.4 0.6 0.6 0.6 0.6 0.6 0.6 

4. Increase in additional tax on distributions from 

HSAs and Archer MSAs not used for qualified medical expenses to 20% .......................................... dma 12/31/10 --- [4] [4] 0.1 0.1 0.1 0.2 0.2 

5. Limit health flexible spending arrangements in 

cafeteria plans to $2,500; indexed to CPI-U after 2013 [1] [5] ........................................................ tyba 12/31/12 --- --- --- 1.5 2.1 2.1 2.0 1.9 

6. Require information reporting on payments to 

corporations ............................................................... pma 12/31/11 --- --- 0.4 3.3 2.0 2.1 2.2 2.3 

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Negligible Revenue Effect - - - - 
Page 2

Provision Effective 2010 2011 2012 2013 2014 2015 2016 2017 

7. Additional requirements for section 501(c)(3) 

hospitals ...................................................................... tyba DOE

8. Impose annual fee on manufacturers and importers 

of branded drugs ($2.5 billion for 2011, $2.8 

billion per year for 2012 and 2013, $3.0 billion per 

year for 2014 through 2016, $4.0 billion for 2017, $4.1 billion for 2018, and $2.8 billion for 2019 and 

thereafter) .................................................................... cyba 12/31/10 --- 2.2 2.9 2.9 2.9 2.9 2.9 3.4 

9. Impose 2.3% excise tax on manufacturers and 

importers of certain medical devices .......................... sa 12/31/12 --- --- --- 1.8 2.7 2.8 3.0 3.1 

10. Impose annual fee on health insurance providers 

($8 billion in 2014, $11.3 billion in 2015 and 2016, $13.9 billion in 2017, $14.3 billion in 2018, and 

indexed to medical cost growth thereafter) ................ [3] --- --- --- --- 6.1 9.3 9.5 11.4 

11. Study and report of effect on veterans health care ..... DOE12. Eliminate deduction for expenses allocable to 

Medicare Part D subsidy ............................................ tyba 12/31/12 --- --- --- 0.4 0.6 0.6 0.6 0.7 

13. Raise 7.5% AGI floor on medical expenses 

deduction to 10%; AGI floor for individuals age 65 and older (and their spouses) remains at 7.5% through 2016 .............................................................. tyba 12/31/12 --- --- --- 0.4 1.5 1.6 1.7 2.5 

14. $500,000 deduction limitation on taxable year 

remuneration to officers, employees, directors, and service providers of covered health insurance 

providers ..................................................................... [6] --- --- --- 0.1 0.1 0.1 0.1 0.1 

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - No Revenue Effect - - - - - - - 

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Negligible Revenue Effect - - - - - 

p [ ]

15. Broaden Medicare Hospital Insurance Tax Base 

for High-Income Taxpayers - additional HI tax of of 0.9% on earned income in excess of $200,000/$250,000 (unindexed) [1], and Unearned Income Medicare Contribution on 3.8% on investment income for taxpayers with AGI in excess of $200,000/$250,000 (unindexed) ................ tyba 12/31/12 --- --- 1.3 20.5 16.6 29.3 32.7 34.8 

16. Modification of section 833 treatment of certain 

health organizations .................................................... tyba 12/31/09 [4] 0.1 0.1 [4] [4] [4] [4] [4] 

17. Impose 10% excise tax on indoor tanning services .... spo/a 7/1/10 [4] 0.2 0.2 0.3 0.3 0.3 0.3 0.3 

Total of Revenue Provisions ......................................................... [4] 2.9 5.5 31.9 35.6 51.8 55.8 61.3 

Other Provisions

1. Provide income exclusion for specified Indian 

tribe health benefits .................................................... [7] --- [2] [2] [2] [2] [2] [2] [2] 

2. Simple cafeteria plan nondiscrimination safe 

harbor for certain small employers ............................. tyba 12/31/10

3. Qualifying therapeutic discovery project credit 

(sunset 12/31/10) ........................................................ [8] -0.4 -0.2 -0.1 -0.1 [2] [2] --- --- 

4. Exclusion for assistance provided to participants in 

State student loan repayment programs for certain health professionals .................................................... tyba 12/31/08 [2] [2] [2] [2] [2] [2] [2] [2] 

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Negligible Revenue Effect - - - - - 
Page 3

Provision Effective 2010 2011 2012 2013 2014 2015 2016 2017 

5. Make the adoption credit refundable; increase 

qualifying expenses threshold, and extend the adoption credit through 2011 ..................................... tyba 12/31/09 -0.2 -0.6 -0.5 [4] --- --- --- --- 

6. Exclusion of unprocessed fuels from the cellulosic 

biofuel producer credit ............................................... fsoua 12/31/09 --- 6.6 6.5 5.5 3.0 1.5 0.4 --- 

7. Codify economic substance doctrine and impose 

penalties for underpayments ....................................... teia DOE 0.1 0.3 0.4 0.5 0.5 0.5 0.5 0.6 

8. Increase by 15.75 percentage points the required 

corporate estimated tax payments factor for corporations with assets of at least $1 billion for 

payments due in July, August, and September 

2014 ............................................................................ DOE --- --- --- --- 8.8 -8.8 --- --- 

Total of Other Provisions ............................................................ -0.5 6.1 6.4 5.9 12.3 -6.8 0.9 0.6 

Revenue-Related Provision - Impose Fee on Insured and Self-Insured Health Plans; PatientCentered Outcomes Research Trust Fund.................. [9] --- --- --- 0.1 0.3 0.3 0.4 0.4 

 NET TOTAL ................................................................................. -0.5 9.0 11.9 37.9 48.2 45.3 57.1 62.3 

Joint Committee on Taxation -------------------------------------- NOTE: Details may not add to totals due to rounding. The date of enactment is assumed to be May 1, 2010.

Legend for "Effective" column: 

cyba = calendar years beginning after fsoua = fuel sold or used after spo/a = servdma = distributions made after pma = payments made after teia = transaDOE = date of enactment sa = sales after tyba = taxab

[1] Estimate includes the following off-budget effects: 2010 2011 2012 2013 2014 2015 2016 2017 

40% excise tax on health coverage................................................ --- --- --- --- --- --- --- --- 

Conform the definition of medical expenses.................................... --- 0.1 0.1 0.1 0.2 0.2 0.2 0.2 Limit health flexible spending arrangements.................................... --- --- --- 0.4 0.6 0.5 0.5 0.5 0.9 percentage point increase to hospital insurance tax ........................ --- --- --- 0.5 -0.2 -0.1 [2] [2] 

[2] Loss of less than $50 million.[3] Effective for calendar years beginning after December 31, 2013; fee is allocated based on market share of net premiums written for any United States health risk for ca

after December 31, 2012.

[4] Gain of less than $50 million.[5] Estimate includes interaction with the high premium excise tax.[6] Effective for remuneration paid in taxable years beginning after 2012 with respect to services performed after 2009.[7] Effective for health benefits and coverage provided after the date of enactment.[8] Effective for amounts paid or incurred after December 31, 2008, in taxable years beginning after December 31, 2008.[9] Effective for each policy plan year ending after September 30, 2012, but does not apply to policy years ending after September 31, 2019.
www.cbo.gov 

CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director 

U.S. Congress 

Washington, DC 20515 

March 19, 2010 

Honorable Paul Ryan 

Ranking Member 

Committee on the Budget 

U.S. House of Representatives 

Washington, DC 20515 

Dear Congressman: 

This letter responds to several questions you have asked about the effects of an 

amendment in the nature of a substitute to H.R. 4872, the Reconciliation Act of 

2010, which was made public on March 18, 2010. That amendment (hereafter 

called “the reconciliation proposal”) represents one component of the health care 

legislation being considered by the Congress; the other component is a bill, 

H.R. 3590, that the Senate passed in December. The analysis provided in this 

letter is based on the preliminary estimate of the direct spending and revenue 

effects of that amendment that was prepared by the Congressional Budget Office 

(CBO) and the staff of the Joint Committee on Taxation (JCT).1

The Combined Budgetary Impact of Enacting the Reconciliation Proposal, 

H.R. 3590, and H.R. 3961 

You asked about the total budgetary impact of enacting the reconciliation 

proposal (the amendment to H.R. 4872), the Senate-passed health bill 

(H.R. 3590), and the Medicare Physicians Payment Reform Act of 2009 

(H.R. 3961). CBO estimates that enacting all three pieces of legislation would add 

$59 billion to budget deficits over the 2010–2019 period. 

Under current law, Medicare’s payment rates for physicians’ services will be 

reduced by about 21 percent in April 2010 and by an average of about 2 percent 

per year for the rest of the decade.2

 H.R. 3961 would increase those payment rates 

 

1

 See Congressional Budget Office, letter to the Honorable Nancy Pelosi about a preliminary 

analysis by CBO and JCT of the direct spending and revenue effects of the reconciliation proposal

(March 18, 2010). 

2

 The payment rates shown here reflect the March 2009 baseline, updated for a final rule regarding 

payments to physicians that was promulgated by the Centers for Medicare and Medicaid Services 
Honorable Paul Ryan 

Page 2 

by 1.2 percent in 2010 and would restructure the sustainable growth rate 

mechanism beginning in 2011. Those changes would result in significantly higher 

payment rates for physicians than those that would result under current law. CBO 

estimates that enacting H.R. 3961, by itself, would cost about $208 billion over 

the 2010–2019 period. (That estimate reflects the enactment of two short-term 

extension acts, which lowered the cost in 2010 by about $2 billion compared with 

CBO’s estimate of November 4, 2009.)3 

H.R. 3590, the Patient Protection and Affordable Care Act, as passed by the U.S. 

Senate on December 24, 2009, would establish a mandate for most residents of 

the United States to obtain health insurance, set up insurance “exchanges” through 

which certain individuals could receive federal subsidies to reduce the cost of 

purchasing that coverage, and make numerous other changes in the health 

insurance system, in federal health care programs, and in the federal tax code. The 

reconciliation proposal would modify the Senate-passed health bill in several 

ways (including changing federal programs involving postsecondary education). 

CBO and JCT estimate that enacting both the reconciliation proposal and 

H.R. 3590, as passed by the Senate, would reduce budget deficits by $138 billion 

over the 2010–2019 period through their effects on direct spending and revenues 

(including the savings achieved through the education provisions). 

CBO estimates that enacting H.R. 3961 together with those two bills would add 

$59 billion to budget deficits over the 2010–2019 period. That amount is about 

$10 billion less than the figure that would result from summing the effects of 

enacting the bills separately. The $10 billion difference occurs primarily because 

H.R. 3590 and the reconciliation proposal would modify how the government’s 

payments to Medicare Advantage plans are set. The higher payment rates for 

physicians that would stem from the enactment of H.R. 3961 would, under current 

law, result in higher payments to those plans. But the changes made by the other 

bills would moderate that increase. 

The Budgetary Impact of Enacting the Reconciliation Proposal and 

H.R. 3590 with Some Provisions Altered 

You also asked about the effects on the federal budget beyond the 2010–2019 

period of enacting the reconciliation proposal (the amendment to H.R. 4872) and 

the Senate-passed health bill (H.R. 3590) if several provisions were altered, either 

now or at some point in the future. In particular, you asked about the effects if: 

 on October 30, 2009; CBO’s estimate of the cost of this legislation was constructed relative to that 

scoring base. Additionally, payment rates were scheduled to be reduced by 21 percent in January 

2010, but the Congress enacted short-term extensions that delayed the reduction. 

3

 See Congressional Budget Office, cost estimate for H.R. 3961, the Medicare Physician Payment 

Reform Act of 2009 (November 4, 2009), available at http://www.cbo.gov/ftpdocs/107xx/ 

doc10704/hr3961.pdf. 
Honorable Paul Ryan 

Page 3 

 the excise tax on insurance plans with relatively high premiums—which 

would take effect in 2018 and for which the thresholds would be indexed 

at a lower rate beginning in 2020—was never implemented; 

 the annual indexing provisions for premium subsidies offered through the 

insurance exchanges continued in the same way after 2018 as before—in 

contrast with the arrangements under the reconciliation proposal, which 

would slow the growth of subsidies after 2019; 

 the adjustment to payment rates for physicians under Medicare contained 

in H.R. 3961 and described above was included; and 

 the Independent Payment Advisory Board—which would be required, 

under certain circumstances, to recommend changes to the Medicare 

program to limit the rate of growth in that program’s spending, and whose 

recommendations would go into effect automatically unless blocked by 

subsequent legislative action—was never implemented. 

A detailed year-by-year projection, like those that CBO prepares for the 10-year 

budget window, would not be meaningful over a longer horizon because the 

uncertainties involved are simply too great. Among other factors, 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 (such as advances in 

medical research, technological developments, and changes in physicians’ 

practice patterns) —that are likely to be significant but are very difficult to 

predict, both under current law and under any proposal. 

CBO has therefore developed a rough outlook for the decade following the 10-

year budget window. Under the analytic approach described in the agency’s 

previous letters, the combined effect of enacting H.R. 3590 and the reconciliation 

proposal would be to reduce federal budget deficits over the decade beyond 2019 

relative to those projected under current law—with a total effect during that 

decade in a broad range around one-half percent of gross domestic product 

(GDP). If the changes described above were made to the legislation, CBO would 

expect that federal budget deficits during the decade beyond 2019 would increase

relative to those projected under current law—with a total effect during that 

decade in a broad range around one-quarter percent of GDP. 

The Budgetary Impact of Enacting the Reconciliation Proposal and 

H.R. 3590 Excluding Cash Flows of the Hospital Insurance Trust Fund 

You further asked about the budgetary impact of enacting the reconciliation 

proposal (the amendment to H.R. 4872) and the Senate-passed health bill 

(H.R. 3590) excluding the cash flows of the Hospital Insurance (HI) trust fund, 

from which Medicare Part A benefits are paid. 
Honorable Paul Ryan 

Page 4 

On the basis of the economic forecast and technical assumptions underlying 

CBO’s March 2009 baseline, CBO projected that, under current law, the HI trust 

fund would be exhausted—that is, the balance of the trust fund would decline to 

zero—during fiscal year 2017. Enacting the reconciliation proposal and the 

Senate-passed health bill would reduce net outlays for Part A of Medicare by 

$286 billion over the 2010–2019 period relative to that baseline, CBO estimates. 

Enacting that legislation would also increase HI payroll tax receipts by about 

$112 billion over that period, according to estimates by CBO and JCT. Together, 

those changes in outlays and revenues would diminish budget deficits and add 

$398 billion plus interest earnings to the trust fund’s balances over that 10-year 

period. Given those changes in the financial flows of the trust fund, CBO 

estimates that the HI trust fund would have a positive balance of about 

$219 billion at the end of fiscal year 2019. 

In the March 18, 2010, preliminary analysis of the budgetary effects of the 

reconciliation proposal, CBO and JCT estimated that the direct spending and 

revenue effects of enacting that proposal together with the Senate-passed health 

bill (H.R. 3590) would yield a net reduction in federal deficits of $138 billion 

over the 2010–2019 period. Thus, the legislation’s effects on the rest of the 

budget—other than the cash flows of the HI trust fund—would amount to a net 

increase in federal deficits of $260 billion over the same period. 

For the decade beyond 2019, CBO expects that enacting the reconciliation 

proposal and the Senate-passed health bill would reduce federal budget deficits 

relative to those projected under current law—with a total effect during that 

decade in a broad range around one-half percent of GDP. The legislation would 

have positive effects on the cash flows of the HI trust fund in that decade that 

would be larger than its effects on federal budget deficits as a whole. Therefore, 

leaving aside the cash flows of the HI trust fund, CBO expects that the 

reconciliation proposal and the Senate-passed health bill would yield a net 

increase in budget deficits during the decade beyond 2019. 

The increase in the balances of the HI trust fund that would result from enacting 

H.R. 3590 and the reconciliation proposal might suggest that significant 

additional resources—$398 billion plus additional interest to be credited to the 

trust fund over time—had been set aside to pay for future Medicare benefits. 

However, only the additional savings by the government as a whole truly increase 

the government’s ability to pay for future Medicare benefits or other programs, 

and those would be much smaller ($138 billion plus interest savings to be 

achieved over time). In effect, the majority of the HI trust fund savings under 

H.R. 3590 and the reconciliation proposal would be used to pay for other 

spending and therefore would not enhance the ability of the government to pay for 

future Medicare benefits. 
Honorable Paul Ryan 

Page 5 

I hope this information is useful to you. If you wish further details, CBO would be 

happy to provide them. The staff contacts for these estimates are Phil Ellis, Lori 

Housman, and Tom Bradley. 

 Sincerely, 

 Douglas W. Elmendorf 

 Director 

cc: Honorable John M. Spratt Jr. 

 Chairman 

 Honorable Nancy Pelosi 

 Speaker 

 Honorable John Boehner 

 Republican Leader
CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director

U.S. Congress 

Washington, DC 20515 

May 11, 2010 

Honorable Jerry Lewis 

Ranking Member 

Committee on Appropriations 

U.S. House of Representatives 

Washington, DC 20515 

Dear Congressman: 

As you requested, the Congressional Budget Office is providing additional information 

about the potential effects of H.R. 3590, the Patient Protection and Affordable Care Act 

(PPACA, Public Law 111-148), on discretionary spending. The following analysis 

updates and expands upon the analysis of potential discretionary spending under PPACA 

that CBO provided on March 13, 2010. In particular, it provides an update of the earlier 

tally of specified authorization amounts, as well as a list of programs or activities for 

which no specific funding levels are identified in the legislation but for which the act 

authorizes the appropriation of “such sums as may be necessary.” 

Potential discretionary costs under PPACA arise from the effects of the legislation on a 

variety of federal programs and agencies. The law establishes a number of new programs 

and activities, as well as authorizing new funding for existing programs. By their nature, 

however, all such potential effects on discretionary spending are subject to future 

appropriation actions, which could result in greater or smaller costs than the sums 

authorized by the legislation. Moreover, in many cases, the law authorizes future 

appropriations but does not specify a particular amount. 

CBO does not have a comprehensive estimate of all of the potential discretionary costs 

associated with PPACA, but we can provide information on the major components of 

such costs. Those discretionary costs fall into three general categories: 

 The costs that will be incurred by federal agencies to implement the new policies 

established by PPACA, such as administrative expenses for the Department of 

Health and Human Services (HHS) and the Internal Revenue Service for carrying 

out key requirements of the legislation. 
Honorable Jerry Lewis 

Page 2 

 Explicit authorizations for a variety of grant and other program spending for which 

specified funding levels for one or more years are provided in the act. (Such cases 

include provisions where a specified funding level is authorized for an initial year 

along with the authorization of such sums as may be necessary for continued 

funding in subsequent years.) 

 Explicit authorizations for a variety of grant and other program spending for which 

no specific funding levels are identified in the legislation. That type of provision 

generally includes legislative language that authorizes the appropriation of “such 

sums as may be necessary,” often for a particular period of time. 

CBO estimates that total authorized costs in the first two categories probably exceed 

$115 billion over the 2010-2019 period, as detailed below.1

 We do not have an estimate 

of the potential costs of authorizations in the third category. 

Implementation Costs For Federal Agencies 

The administrative and other costs for federal agencies to implement the act’s provisions 

will be funded through the appropriations process; sufficient discretionary funding will 

be essential to implement this legislation in the time frame called for. Major costs for 

such implementation activities will include: 

 Costs to the Internal Revenue Service (IRS) of implementing the eligibility 

determination, documentation, and verification processes for premium and costsharing credits. CBO expects that those costs will probably total between 

$5 billion and $10 billion over 10 years. 

 Costs to HHS, especially the Centers for Medicare and Medicaid Services, and the 

Office of Personnel Management for implementing the changes in Medicare, 

Medicaid, and the Children’s Health Insurance Program, as well as certain reforms 

to the private insurance market. CBO expects that those costs will probably total at 

least $5 billion to $10 billion over 10 years. 

Explicit Authorizations of Discretionary Funding 

Explicit authorizations are identified in Tables 1 and 2. Table 1 presents a list of items for 

which PPACA specifies the authorized amount of funding for at least one year. It also 

includes items for which initial specified funding levels existed under prior law but for 

which PPACA extends the authority for continued spending. The specified and estimated 

amounts shown in Table 1 total about $105 billion over the 2010-2019 period. 

 

 

1. Subsequent legislation, H.R. 4872, the Health Care and Education Reconciliation Act (P.L. 111-152), modified 

a number of provisions of H.R. 3592. However, H.R. 4872 contains no authorizations or changes in 

authorizations of discretionary spending. 
Honorable Jerry Lewis 

Page 3 

Table 1 differs from CBO’s table of specified authorizations provided on 

March 13, 2010, in the following ways: 

 Certain provisions that extend (existing) authorizations with a specified level have 

been added. (In the previous version of that table, only new authorizations were 

included.) Also, provisions that provide mandatory grants for 2010 but authorize 

future spending of such sums as necessary (subject to appropriation) have been 

included. Those provisions are noted in the updated table. 

 Table 1 includes an estimate of the cost of section 10221 of PPACA, which 

incorporates the provisions of S. 1790, the Indian Health Care Improvement 

Reauthorization and Extension Act by reference. (CBO had not completed an 

estimate of the Indian health provisions for the March 13 version of the 

authorization table.) Those provisions authorize the appropriation of such sums as 

are necessary for the Indian Health Service (IHS) for carrying out responsibilities 

broadly similar to those in law prior to enactment of PPACA. As a result, the 

amounts included in Table 1 reflect recent appropriations for those IHS programs, 

with adjustments for anticipated inflation in later years. 

 Table 1 also includes a few corrections to the table provided on March 13. For 

example, section 5207, which authorizes funding for the National Health Service 

Corps, was inadvertently left off the March 13 table but is included in Table 1. 

Table 2 presents a list of new activities for which PPACA includes only a broad 

authorization for the appropriation of “such sums as may be necessary.” For those 

activities, the lack of guidance in the legislation about how new activities should be 

conducted means that, in many cases, CBO does not have a sufficient basis for estimating 

what the “necessary” amounts might be over the 2010-2020 period. 

Although Tables 1 and 2 provide more information about the discretionary costs 

associated with PPACA, they do not represent all of the potential budgetary implications 

of changes to existing discretionary programs—including both potential increases and 

decreases relative to recent appropriations. Some of those changes could affect spending 

under existing authorizations or may lead the Congress to consider making changes—up 

or down—in the funding for existing programs. Moreover, some of the potential new 

costs for individual provisions of the legislation may be covered by the broad estimate of 

$5 billion to $10 billion for administrative costs to HHS. 

 
Honorable Jerry Lewis 

Page 4 

I hope you find this information useful. If you have any questions about this updated 

analysis of PPACA’s implications for future discretionary appropriations, please contact 

me or CBO staff. The primary staff contacts for this analysis are Jean Hearne and Julie 

Lee. 

 Sincerely, 

 Douglas W. Elmendorf 

 Director 

Enclosures 

cc: Honorable David R. Obey 

 Chairman 

Identical letter sent to the Honorable Thad Cochran. 
Table 1. Specified and Certain Estimated Authorizations for Spending Subject to Appropriation in H.R. 3590, the Patient

Protection and Affordable Care Act (P.L. 111-148)

(By fiscal year, in millions of dollars)

2010-2019

Title and Section 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total

Title I

1002 Health insurance consumer information10 31 32 34 36 38 40 41 43 45 340

Title II

2952 Post-partum depression 3 3 3 0 0 0 0 0 0 0 9

Title III

3013 Quality measure development 75 75 75 75 75 0 0 0 0 0 375

3129 Extension of Medicare rural hospital flexibility20 42 44 0 0 0 0 0 0 0 87

3501 Health care delivery system research 20 <= Authorized for fiscal years 2010-2014 20

3504 Regionalized systems for emergency care response 24 24 24 24 24 0 0 0 0 0 120

3505 Trauma care centers 103 105 110 117 124 129 0 0 0 0 689

Grants to states for trauma services 100 100 100 100 100 100 0 0 0 0 600

3510 Patient navigator program20 4 4 4 4 4 0 0 0 0 20

Title IV

4304 Epidemiology-laboratory capacity grants 190 190 190 190 0 0 0 0 0 0 760

Title V

5102 State health care workforce development --

Planning grants 8 8 8 8 8 8 8 8 8 8 80

Implementation grants 150 154 162 171 181 189 198 206 214 223 1,848

5103 Health care workforce assessment - National center 8 8 8 8 8 0 0 0 0 0 38

State and regional centers 5 5 5 5 5 0 0 0 0 0 23

5203 Health care workforce loan repayment program--

Pediatric medical and surgical specialists 30 30 30 30 30 0 0 0 0 0 150

Pediatric mental & behavioral health specialists 20 20 20 20 0 0 0 0 0 0 80

5204 Public health workforce loan repayment program 195 200 210 223 235 246 0 0 0 0 1,310

5206 Training for mid-career public and allied health professionals 60 62 65 69 72 76 0 0 0 0 403

5207 Funding for the National Health Service Corps3

320 414 535 691 893 1,154 1,204 1,255 1,305 1,357 9,128

5208 Nurse managed health clinics 50 51 54 57 60 0 0 0 0 0 273

5210 Commissioned corp and ready reserve corp 18 18 18 18 18 0 0 0 0 0 88

5301 Primary care training & enhancement 125 128 135 143 151 0 0 0 0 0 682

Integrating academic adminstrative units 1 1 1 1 1 0 0 0 0 0 4

5302 Training for direct care workers 0 10 <= Authorized for fiscal years 2011-2013 10

5303 Pediatric and public health dentistry 30 31 32 34 36 38 0 0 0 0 201

5305 Geriatric workforce development 0 11 <= Authorized for fiscal years 2011-2014 11

Geriatric career incentive awards 0 10 <= Authorized for fiscal years 2011-2013 10

Continued
Table 1. Specified and Certain Estimated Authorizations for Spending Subject to Appropriation in H.R. 3590, the Patient

Protection and Affordable Care Act (P.L. 111-148)

(By fiscal year, in millions of dollars)

2010-2019

Title and Section 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total

5306 Mental and behavioral health education and training grants 35 <= Authorized for fiscal years 2010-2013 35

5312 Parts B-D of Title VIII 338 347 364 386 408 427 445 0 0 0 2,715

5314 Fellowship training in public health 40 40 40 40 0 0 0 0 0 0 158

5401 Centers of excellence 50 50 50 50 50 50 52 54 57 59 522

5402 Scholarships for disadvantaged students 51 52 55 58 62 0 0 0 0 0 278

Loan repayments and fellowships for faculty 5 5 5 5 5 0 0 0 0 0 25

60 62 65 69 72 0 0 0 0 0 327

5403 Area health education centers 125 125 125 125 125 0 0 0 0 0 625

5 5 5 5 5 5 5 6 6 6 53

5405 Primary care extension program 0 120 120 127 134 0 0 0 0 0 502

5508 Teaching health centers 25 50 50 53 56 59 61 64 66 69 552

5601 FQHC grants 2,989 3,862 4,991 6,449 7,333 8,333 0 0 0 0 33,956

5603 Wakefield emergency medical services program 25 26 28 29 30 0 0 0 0 0 138

5604 Co-locating primary and specialty mental health care 50 51 54 57 60 0 0 0 0 0 273

5605 Key national indicators 10 8 8 8 8 8 8 8 8 0 70

Title VI

6703 Elder uustice--

Elder Justice Coordinating Council and Advisory Board 0 7 7 7 7 0 0 0 0 0 28

Elder Abuse, Neglect and Exploitation Forensic Centers 0 4 6 8 8 0 0 0 0 0 26

Enhancement of LTC 0 20 18 15 15 0 0 0 0 0 68

Adult protective services - secretarial responsibilities 0 3 4 4 4 0 0 0 0 0 15

Grants for adult protective services 0 100 100 100 100 0 0 0 0 0 400

State demonstration programs 0 25 25 25 25 0 0 0 0 0 100

Grants to support LTC ombudsman program 0 5 8 10 10 0 0 0 0 0 33

Ombudsman training programs 0 10 10 10 10 0 0 0 0 0 40

National training institute for surveyers 0 12 <= Authorized for fiscal years 2011-2014 12

Grants to state survey agencies 0 5 5 5 5 0 0 0 0 0 20

Continued

Educational assistance for individuals from disadvantaged 

backgrounds

Continuing educational support for health professionals in 

underserved communities

Page 2 of 3
Table 1. Specified and Certain Estimated Authorizations for Spending Subject to Appropriation in H.R. 3590, the Patient

Protection and Affordable Care Act (P.L. 111-148)

(By fiscal year, in millions of dollars)

2010-2019

Title and Section 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total

Title X

10221 Indian health improvement act (S. 1790)44,170 3,780 3,840 3,740 3,780 3,750 3,910 3,990 4,070 4,160 39,190

10408 Grants for workplace wellness programs 0 200 <= Authorized for fiscal years 2011-2015 200

10409 Cures acceleration network 500 514 539 571 603 631 659 686 713 742 6,159

10410 Centers of excellence for depression 0 100 100 100 100 100 150 150 150 150 1,100

10412 Automated defibillation in Adam's memory2

25 25 25 25 25 25 25 25 25 25 250

10413 Young women's breast health awareness 9 9 9 9 9 0 0 0 0 0 45

10501 Rural physician training grants 4 4 4 4 0 0 0 0 0 16

Preventive medicine & public health training grants 0 43 45 48 50 53 0 0 0 0 239

10607 0 50 <= Authorized for fiscal years 2011-2015 50

Total of Specified Authorizations 105,575

Notes: The table does not represent a comprehensive estimate of discretionary spending authorized by H.R. 3590. It includes:

l Amounts specified in the act, plus estimated authorizations for subsequent years where H.R. 3590 provides a specified authorization for 2010 or 2011 and an

authorization of such sums as may be necessary for later years.

l Estimated authorizations for subsequent years where there is an appropriation under prior law for 2010 and H.R. 3590 provides for an authorization of such sums

as necessary for later years.

Subsequent legislation, H.R. 4872, the Health Care and Education Reconciliation Act (P.L. 111-152), modified a number of provisions of H.R. 3590. However,

H.R. 4872 contains no authorizations or changes in authorizations of discretionary spending.

1.

2.

3.

FQHC = Federally qualified health centers; LTC = Long-term care

H.R. 3590 authorized and appropriated amounts for 2010 and such sums as necessary for subsequent years. The 2010 amounts were included in the March 13 estimate for H.R. 

3590 Spending for years subsequent to 2010 are calculated here to be equal to the 2010 amounts increased (or decreased) based on the CBO's estimates of GDP growth for 

those subsequent years.

Current-law appropriations exist for 2010. H.R. 3590 authorizes such sums as necessary for subsequent years. Those amounts are calculated here to be equal to the 2010 

appropriation increased (or decreased) based on the CBO's estimates of GDP growth for those subsequent years.

H.R. 3590 incorporates the Indian Health Care Improvement Reauthorization and Extension Act (S. 1790) by reference. That act authorizes the appropriation of such sums as are 

necessary for the Indian Health Service (IHS) for carrying out responsibilities broadly similar to those in current law. These amounts reflect CBO’s baseline for discretionary 

spending for IHS programs. 

For 2016 and subsequent years, H.R. 3590 establishes a formula for calculating spending authority. Those amounts are estimated here based on the CBO's 

estimates of GDP growth for those subsequent years.

State demonstration programs on alternatives to medical tort 

litigation

4.

Page 3 of 3
Table 2. Provisions of H.R. 3590, the Patient Protection and Affordable Care Act (P.L. 111-148), with

Authorizations of Appropriations Without Specified Amounts

Title and Section

Title II

2705 Medicaid global payment system demonstration Such sums as necessary

2706 Pediatric ACO demonstration Such sums as necessary

Title III

3015 Data collection of quality and resource use measures Such sums as necessary for fiscal years 2010-2014

Public reporting of performance information Such sums as necessary for fiscal years 2010-2014

3504 Support for emergency medicine research Such sums as necessary for fiscal years 2010-2014

3506 Shared decisionmaking Such sums as necessary

3509 HHS Office on women's health Such sums as necessary for fiscal years 2010-2014

CDC Office on women's health Such sums as necessary for fiscal years 2010-2014

AHRQ Office on women's health Such sums as necessary for fiscal years 2010-2014

HRSA Office on women's health Such sums as necessary for fiscal years 2010-2014

FDA Office on women's health Such sums as necessary for fiscal years 2010-2014

3511 General authorizaton of appropriations for 

sections 3501-3510

Such sums as necessary

Title IV

4003 Preventive services task force Such sums as necessary

Community preventive services task force Such sums as necessary

4004 Education and outreach campaign regarding preventive benefits Such sums as necessary

4101 Operations grants for school-based health centers Such sums as necessary for fiscal years 2010-2014

4102 Oral health prevention activities Such sums as necessary

Oral health infrastructure Such sums as necessary for fiscal years 2010-2014

Oral health surveillance activites -- PRAMS Such sums as necessary

Oral health surveillance system Such sums as necessary for fiscal years 2010-2014

4201 Community transformation grants Such sums as necessary for fiscal years 2010-2014

4202 Healthy aging, living well Such sums as necessary for fiscal years 2010-2014

4204 Demonstration to improve immunization coverage Such sums as necessary for fiscal years 2010-2014

Re-authorizaton of immunization program Such sums as necessary

4206 Demonstration program for individualized wellness plans Such sums as necessary

4302 Health disparities data Such sums as necessary for fiscal years 2010-2014

4305 IOM conference on pain Such sums as necessary for fiscal years 2010-2011

Program for education & training in pain care Such sums as necessary for fiscal years 2010-2012

Title V

5101 National health care workforce commission Such sums as necessary

5103 Health care workforce assessment -- longitudinal evaluation grants Such sums as necessary for fiscal years 2010-2014

5304 Alternative dental demonstration project Such sums as necessary

5305 Comprehensive geriatric education Such sums as necessary for fiscal years 2010-2014

Continued

Page 1 of 2
Table 2. Provisions of H.R. 3590, the Patient Protection and Affordable Care Act (P.L. 111-148), with

Authorizations of Appropriations Without Specified Amounts

Title and Section

5307 Cultural competancy training Such sums as necessary for fiscal years 2010-2015

Grants for health professions education Such sums as necessary for fiscal years 2010-2015

5309 Nurse education, practice, and quality grants Such sums as necessary for fiscal years 2010-2014

Nurse retention grants Such sums as necessary for fiscal years 2010-2012

5311 Nurse faculty loan program Such sums as necessary for fiscal years 2010-2014

5313 Community health workforce grants Such sums as necessary for fiscal years 2010-2014

Title VI

6112 National independent monitor demonstration project Such sums as necessary

6114 Demonstrations on culture change and use of 

information technology in nursing homes

Such sums as necessary

6703 National nurse aid registry and report Such sums as necessary

Title VII

7002 Approval pathway for biosimilar products - user 

fee program

Such sums as necessary for fiscal years 2010-2012

7102 340B program integrity Such sums as necessary

Title VIII

8002 CLASS Independence Advisory Council Such sums as necessary for fiscal year 2011 and beyond

Title X

10104 Multi-state plans in exchange Such sums as necessary

10333 Community based collaborative care program Such sums as necessary for fiscal years 2011-2015

10334 Office of minority health Such sums as necessary for fiscal years 2011-2016

10407 Better diabetes care Such sums as necessary

10411 Programs related to congenital heart disease Such sums as necessary for fiscal years 2011-2015

10501 Family nurse practitioner training programs Such sums as necessary for fiscal years 2011-2014

National diabetes prevention program Such sums as necessary for fiscal years 2010-2014

10504 Demonstration to provide access to affordable care Such sums as necessary

Notes: Subsequent legislation, H.R. 4872, the Health Care and Education Reconciliation Act (P.L. 111-152), modified a number of provisions of 

H.R. 3590. However, H.R. 4872 contains no authorizations or changes in authorizations of discretionary spending.

ACO = Accountable Care Organization; PRAMS = Pregnancy Risk Assessment Monitoring System; IOM = Institute of Medicine; 

HHS = Health and Human Services; CDC = Centers for Disease Control; AHRQ = Agency for Health Care Research and Quality; 

HRSA = Health Resources and Services Administration; FDA= Food and Drug Administration; GME = Graduate Medical Education; 

CLASS = Community Living Assistance Services and Supports

Page 2 of 2
Additional Information on the Potential Discretionary Costs of Implementing

the Patient Protection and Affordable Care Act (PPACA) 

On March 13, 2010, CBO provided preliminary information about the potential effects of the 

Patient Protection and Affordable Care Act on discretionary spending. (Because of time 

constraints, CBO could not do a complete analysis of discretionary costs at that time.) CBO 

described discretionary effects of those provisions that could total at least $60 billion over 10 

years ($50 billion in specified items and at least $10 billion in estimated costs to the Internal 

Revenue Service and the Department of Health and Human Services). 

Since then, CBO has had an opportunity to analyze other provisions with potential effects on 

discretionary spending. On May 11, 2010, CBO added to its previous analysis, identifying 

additional discretionary items including those authorized under current law but continued in 

PPACA, and some additional items for which the legislation would authorize continued funding 

after 2010. That information, provided in identical letters to Congressman Jerry Lewis and 

Senator Thad Cochran, also provided a list of programs or activities for which no specific 

funding levels are identified in the legislation but for which the act authorizes the appropriation 

of “such sums as may be necessary.” The May 11 letter identified possible discretionary 

spending of at least $115 billion over the 2010-2019 period. Whether that spending will 

ultimately occur will depend on future appropriation actions. 

The potential discretionary costs identified in both CBO’s earlier analysis and the letters 

provided on May 11 include many items whose funding would be a continuation of recent 

funding levels for health-related programs or that were previously authorized and that 

PPACA would authorize for future years. Some of those items include: 

• Section 3129 – Extension of Medicare rural hospital flexibility program ($0.1 billion over 

the 2010–2019 period) 

• Section 5207 – Funding for the National Health Service Corp ($9.1 billion over the 

2010–2019 period) 

• Section 5312 – Funding for Parts B-D of Title VIII of the Public Health Service Act 

(relating to nursing workforce development) ($2.7 billion over the 2010–2019 period) 

• Section 5401 – Centers of Excellence ($0.5 billion over the 2010–2019 period) 

• Section 5402 – Scholarships, loans and educational assistance relating to students from 

disadvantaged backgrounds ($0.6 billion over the 2010–2019 period) 

• Section 5601 – Federally qualified health center grants ($33.6 billion over the 2010–2019 

period) 

• Section 5603 – Wakefield emergency medical services program ($0.1 billion over the 

2010–2019 period) 
• Section 10221 – Indian health improvement act ($39.2 billion over the 2010–2019 

period) 

• Section 10412 -- Automated defibrillation ($0.25 billion over the 2010–2019 period) 

CBO estimates that the amounts authorized for these items exceed $86 billion over the 10-year 

period (out of the roughly $105 billion total shown in the table that was provided along with the 

May 11 letter). Thus, CBO’s discretionary baseline, which assumes that 2010 appropriations are 

extended with adjustments for anticipated inflation, already accounts for much of the potential 

discretionary spending under PPACA. 

 

In addition, there are a number of other items that could overlap some or even by a considerable 

amount with current law activities assumed in CBO’s baseline. Title V of PPACA includes many 

of those items. For example, section 5210 and sections 5301-5303 of PPACA replace provisions 

of prior law with new provisions offering a great deal more detail. The May 11 letter addresses 

these potential sources of overlap. The last paragraph on page 3 of that letter states: “Although 

Tables 1 and 2 provide more information about the discretionary costs associated with PPACA, 

they do not represent all of the potential budgetary implications of changes to existing 

discretionary programs—including both potential increases and decreases relative to recent 

appropriations...” 
www.cbo.gov 

CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director 

U.S. Congress 

Washington, DC 20515 

November 4, 2010 

Honorable Paul Ryan 

Ranking Member 

Committee on the Budget 

U.S. House of Representatives 

Washington, DC 20515 

Dear Congressman: 

As you requested, this letter describes how the Congressional Budget Office 

(CBO) analyzed the effects on prescription drug prices of certain provisions of the 

Patient Protection and Affordable Care Act, or PPACA, (P.L. 111-148) and the 

Health Care and Education Reconciliation Act of 2010 (P.L. 111-152). 

That legislation requires manufacturers of brand-name drugs to provide new 

discounts and rebates for drugs purchased through Medicare and Medicaid, with 

the amount of those discounts and rebates based on the prices of the drugs. 

Manufacturers thus have an incentive to raise those prices to offset the costs of 

providing the new discounts and rebates, although other forces will limit their 

ability to do so. 

For drugs covered by Medicare’s drug benefit, CBO estimated that those 

provisions of the legislation would raise the prices paid by pharmacies less any 

rebates paid to insurers by manufacturers by about 1 percent, on average. That 

increase in prices would make federal costs for Medicare’s drug benefit and the 

costs faced by some beneficiaries slightly higher than they would be in the 

absence of those provisions, while the new discounts would make the costs faced 

by other beneficiaries substantially lower. For newly introduced drugs purchased 

through Medicaid, CBO estimated that those provisions would raise the prices 

paid by pharmacies by about 4 percent, on average. For currently available drugs 

purchased through Medicaid, which account for the bulk of projected Medicaid 

drug spending over the next decade, other provisions of law will constrain 

manufacturers’ ability to raise prices to offset the new rebates. The combined 

effect of the increase in prices and new rebates is that Medicaid would pay less 

for drugs, on average, than it would in the absence of those provisions. 
Honorable Paul Ryan 

Page 2 

The legislation contains several other provisions that will affect drug prices as 

well: 

• It establishes an abbreviated pathway for approving “follow-on” biological 

drugs, and the resulting increase in competition will yield substantially 

lower prices for certain drugs. However, the affected drugs represent a 

relatively small share of projected total drug spending over the next 

decade, so CBO estimated that the average effect on drug prices would be 

modest—a reduction of about 2 percent in 2019. 

• The legislation also imposes an annual fee on manufacturers and importers 

of brand-name drugs. CBO expects that the fee will probably increase the 

prices of drugs purchased through Medicare and the prices of newly 

introduced drugs purchased through Medicaid and other federal programs 

by about 1 percent. Those increases will be in addition to the ones 

described above that stem from the new requirements for discounts and 

rebates. 

• Furthermore, the legislation expands drug coverage under the Medicare 

benefit (by gradually filling in the coverage gap, or “doughnut hole”) and 

extends insurance coverage to people who would otherwise have been 

uninsured (more than 30 million non-elderly people by the second half of 

the decade, according to CBO’s estimates). Both of those expansions in 

coverage could affect drug prices—but CBO estimated the expansions’ 

overall effects on insurance premiums and federal spending and not their 

effects on drug prices in particular. 

The various provisions of the legislation will exert competing pressures on drug 

prices paid by private purchasers. CBO estimated that the overall impact on those 

prices would be small, on average. 

Given the intricacy of the mechanisms for setting drug prices and the numerous 

features of the health care legislation that affected those prices, CBO’s estimates 

of the effects of the legislation on drug prices were necessarily uncertain. The 

actual effects could be larger or smaller than CBO estimated. 

Brief Background on Prescription Drug Pricing 

Analyzing the effects of any legislation on prescription drug prices is a complex 

task because the mechanisms for setting those prices are complex. As drugs move 

from manufacturers to consumers, a series of transactions occur that also involve 

wholesalers, pharmacies, and insurers. In particular, the price paid by a pharmacy 

to acquire a brand-name drug is generally not the net cost of obtaining the drug 

from the manufacturer because manufacturers frequently pay rebates on brandname drugs to insurers. Although there are many different prices paid along the 

supply chain, CBO’s analysis has generally focused on two prices—the price paid 
Honorable Paul Ryan 

Page 3 

by a pharmacy, and the so-called “net price,” which is the price paid by the 

pharmacy less any rebates paid to insurers by the manufacturer.1

The rebate amounts vary by payer and by drug and are determined in different 

ways. Federal law requires manufacturers to pay a statutory rebate for drugs 

dispensed to Medicaid beneficiaries, whereas in Medicare Part D and in the 

private sector, insurers negotiate with brand-name drug manufacturers over the 

rebate amounts.2

 Manufacturers offer rebates to purchasers who act in ways that 

increase the market shares of their drugs. For example, health plans can increase 

the market shares of certain drugs by charging a lower copayment for those 

preferred drugs than for other (non-preferred) drugs that are therapeutically 

similar. A purchaser’s bargaining power with manufacturers reflects its ability to 

influence which drug is purchased from a set of therapeutically similar drugs and, 

to a lesser extent, depends on its volume of purchases. Because those 

characteristics vary across purchasers, different purchasers can pay different net 

prices for the same drug. 

Effects of the New Required Medicare Discount 

Currently, the standard outpatient prescription drug benefit under Part D of 

Medicare has the following features: an annual deductible for which the 

beneficiary is responsible; a dollar range of coverage in which the beneficiary 

pays 25 percent of the cost of covered drugs; and a catastrophic threshold above 

which the beneficiary pays about 5 percent of the cost of covered drugs. In the 

gap between the end of the initial coverage range and the catastrophic threshold—

commonly referred to as the doughnut hole—most beneficiaries are liable for all 

of their drug costs. For Part D insurance coverage, most beneficiaries pay 

premiums that finance about 25 percent of the cost of the coverage (on average); 

the federal government pays the remaining 75 percent. Beneficiaries with limited 

means, however, may enroll in a low-income subsidy (LIS) program, through 

which the federal government covers a much larger share of their prescription 

drug costs—including their premiums and most of their spending in the doughnut 

hole. 

Starting in 2011, the health care legislation requires manufacturers to provide a 50 

percent discount to Part D beneficiaries who are not enrolled in the LIS program 

for brand-name drugs they purchase in the doughnut hole. (The legislation also 

phases in coverage under Part D for both brand-name and generic drugs 

purchased in that range of spending, increasing the generosity of the Part D 

benefit.) Under Part D, private plans deliver the drug benefit and negotiate their 

own prices with drug manufacturers and pharmacies while competing with each 

other for enrollees. The new discount will be taken as a percentage of those 

negotiated prices. Although it would not be feasible for manufacturers to increase 

 

1

 For further discussion of drug pricing, see Congressional Budget Office, Prescription Drug 

Pricing in the Private Sector (January 2007). 2

 In addition, many state Medicaid programs negotiate with manufacturers to obtain supplemental 

rebates for Medicaid drugs. 
Honorable Paul Ryan 

Page 4 

net prices only for the people receiving the discount, they will have some latitude 

to offset at least part of the impact of the new discount by increasing net prices 

charged to all Part D beneficiaries either by increasing prices charged to 

pharmacies or by reducing rebates paid to insurers. 

Effects on Drug Prices and Federal Costs in Part D. CBO expected that 

pharmaceutical manufacturers would respond to the discount program by slightly 

increasing the net prices charged for Part D drugs. 

The increase in net prices is expected to be small for two reasons. First, the 

discount is required for a relatively small share of spending under Part D; CBO 

estimates that spending on brand-name drugs in the doughnut hole by 

beneficiaries who were not enrolled in the LIS program constituted about 10 

percent of total Part D spending in 2007, and that share is probably similar today. 

(There will likely be a small increase in spending eligible for the discount because 

of the increased generosity of the Part D benefit.) Therefore, an increase in net 

prices for all drugs sold in Part D of roughly 5 percent would fully offset the total 

costs of the required discount. Second, CBO did not anticipate that manufacturers 

would completely offset the costs of providing the discount because they would 

still have to negotiate with drug plans and offer rebates to receive preferred status. 

Given the pattern of existing rebates described above, CBO expected that the 

change in net prices would likely differ by drug, with larger increases for drugs 

with few substitutes and smaller increases for drugs with many competitors. 

Overall, CBO expected that net prices of drugs (as defined above, the prices paid 

by pharmacies less any rebates paid by manufacturers) under Part D would 

increase by about 1 percent, on average, as a result of the manufacturers’ response 

to the discount program. Thus, CBO expected that federal costs for premium and 

cost-sharing subsidies would be about 1 percent higher than they would otherwise 

be. 

Effects on Beneficiaries in Part D. The premiums of drug plans will increase 

along with the increase in net drug prices, so the premiums paid by beneficiaries 

will increase slightly.3

 The effects of higher net drug prices on out-of-pocket 

spending by Part D beneficiaries will vary depending on whether they are enrolled 

in the LIS program and, if not, on the amount of their spending: 

• Beneficiaries enrolled in the LIS program face little or no cost sharing, so 

their out-of-pocket spending will be largely unaffected (although some 

copayments in the LIS program are indexed to spending growth and thus 

will be slightly higher). 

 

3

 The gradual elimination of the coverage gap under the legislation will generate a larger increase 

in premiums. See Congressional Budget Office, “The Estimated Change in Medicare Part D 

Premiums from Provisions in H.R. 3200, America’s Affordable Health Choices Act of 2009,” 

letter to the Honorable Dave Camp (August 28, 2009). 
Honorable Paul Ryan 

Page 5 

• Beneficiaries who are not enrolled in the LIS program and have spending 

below the benefit’s initial coverage limit will, on average, pay slightly 

more toward their deductibles, coinsurance, and copayments. 

• Beneficiaries who are not enrolled in the LIS program and reach the 

coverage gap will pay substantially less for those drugs because the 

discount will be 50 percent and the average increase in net prices will be 

much smaller. For most such beneficiaries, this effect will probably 

outweigh the effect of higher out-of-pocket payments for drugs purchased 

in the initial coverage range, and thus they will probably pay less for their 

drugs overall. 

• Beneficiaries who reach the catastrophic phase of the benefit will 

generally pay only a little more for those drugs because their cost sharing 

is about 5 percent. 

Effects of the Increased Rebate under Medicaid 

The health care legislation also increases the minimum rebate that manufacturers 

of brand-name drugs must provide under Medicaid. To see how that requirement 

is likely to affect drug prices, it is useful to review the key features of Medicaid’s 

rebate program. 

The Medicaid Rebate Program. Pharmaceutical manufacturers that participate 

in the Medicaid program are required to provide a rebate for drugs dispensed to 

Medicaid beneficiaries, which reduces federal and state Medicaid spending. 

Medicaid rebates are calculated on the basis of two prices: 

• the “best price,” which is essentially the lowest price paid by a private 

purchaser (including some but not all private rebates); and 

• the average manufacturer price (AMP), which is the average price paid by 

retail pharmacies (not counting any rebates to private insurers). 

Initially, the Medicaid rebate for brand-name drugs is the greater of a fixed 

percentage of the AMP that is specified in law, or the difference between the 

AMP and the best price; as a result, Medicaid pays an amount less than or equal 

to the best price. An additional rebate for a brand-name drug is required if its 

price rises faster than overall inflation (as measured by the consumer price index 

for all urban consumers). The Medicaid rebate for generic drugs is a fixed 

percentage of the AMP. Some states also negotiate supplementary rebates with 

manufacturers, and those rebates are shared with the federal government. Such 

supplementary rebates totaled roughly 10 percent of all rebates collected by 

Medicaid in fiscal year 2009. 4

 

4

 For a more detailed discussion of the Medicaid rebate program, see Congressional Budget 

Office, Prices for Brand-Name Drugs under Selected Federal Programs (July 2005). 
Honorable Paul Ryan 

Page 6 

Effects of the Legislation. The health care legislation increased Medicaid’s 

minimum rebate for most brand-name drugs from 15.1 percent to 23.1 percent of 

the AMP. CBO expected that manufacturers would offset some of the higher 

rebates they will pay by charging higher launch prices for new drugs—

particularly breakthrough drugs that use new mechanisms to treat illnesses. 

Additionally, CBO expected manufacturers to reduce slightly the amount of 

supplementary rebates offered to states. 

Manufacturers’ ability to raise prices on drugs that are already on the market is 

constrained, however, by the additional rebate required for drugs whose prices 

grow faster than inflation. Moreover, competition from drugs already on the 

market will probably limit the extent to which manufacturers charge higher prices 

for certain new drugs, particularly those that are different formulations or 

strengths of products already on the market. In addition, states’ continuing efforts 

to negotiate supplemental rebates in return for preferred treatment will tend to 

limit manufacturers’ ability to reduce such rebates. 

Overall, CBO expected that the combination of the higher required Medicaid 

rebate and the new required Medicare discount would lead manufacturers to 

increase the average price paid by retail pharmacies for new drugs by about 4 

percent. The effect of those higher prices on the average price that Medicaid pays 

for all drugs would be very small at first but would increase gradually over time 

as spending on newly introduced drugs becomes a larger share of total drug 

spending. Even so, CBO expected that the increase in the average price paid by 

retail pharmacies would not fully offset the increase in the rebate, so that 

Medicaid would pay a lower price for drugs, on average. 

Effects of Establishing a New Approval Process for Biological Drugs 

For brand-name drugs that have been approved under the federal Food, Drug, and 

Cosmetic Act, an abbreviated regulatory process exists for approving generic 

alternatives once a patent expires. As a result, following the expiration of a patent, 

a number of lower-priced generic drugs usually become available, generating 

substantial savings to purchasers. By contrast, such competition has been largely 

absent in the market for biological drugs (which are much more complex 

molecules derived from living organisms). Those products are usually licensed 

under the Public Health Service Act (PHSA), which had no comparable 

abbreviated regulatory process for licensing “follow-on” products that are similar 

to—but may not be exact copies of—the original brand-name products. (Such 

drugs are sometimes called follow-on biologics or “bio-similars.”) 

The health legislation established an abbreviated approval pathway for follow-on 

biologics licensed under the PHSA. The lower cost of obtaining approval under 

the abbreviated pathway will encourage multiple manufacturers of follow-on 

biologics to enter the market more quickly, particularly for top-selling products, 

and the resulting competition will generate savings to purchasers of those drugs. 
Honorable Paul Ryan 

Page 7 

CBO estimated that follow-on biologics would initially have prices about 25 

percent below their brand-name counterparts and after several years of 

competition would have prices about 40 percent below those counterparts (on an 

average sales-weighted basis). Biological drugs that will probably face 

competition from follow-on biologics over the next ten years currently account 

for roughly 10 percent of total drug spending in the United States. Because 

follow-on biologics may not be viewed as perfect substitutes for their brand-name 

counterparts—especially when they first become available—sales of those brandname versions will probably continue to represent a large share of total sales 

through 2019. As a result, CBO estimated that the average reduction in prices 

across all drugs resulting from the abbreviated approval pathway for follow-on 

biologics would be about 2 percent in 2019. 

Effects of Other Provisions of the Legislation 

The health care legislation imposes a fee on manufacturers and importers of 

brand-name prescription drugs, which will be allocated among firms on the basis 

of drug sales to government programs. Because that fee will not impose an 

additional cost for drugs sold in the private market, CBO and the staff of the Joint 

Committee on Taxation expected that it would not result in measurably higher 

costs for private purchasers. However, CBO expects that prices for drugs 

purchased through Medicare, and for newly introduced drugs purchased through 

Medicaid and other federal programs, will probably increase by about 1 percent as 

a result of the fee. The amount of the fee will vary from year to year over the 

coming decade, so the impact on prices may vary as well. 

Additionally, provisions of the legislation requiring that individuals purchase 

health insurance and providing subsidies for private health insurance coverage are 

expected to raise the number of individuals with health insurance. The people 

who would not otherwise have had insurance to cover part of their drug spending 

will be less sensitive to the prices of their prescriptions, which would give 

manufacturers room, all else equal, to raise drug prices slightly. However, entities 

that administer the expanded coverage might make aggressive use of costmanagement tools, some of which could result in substantial price discounts and 

changes in the mix of drugs prescribed or purchased. Furthermore, CBO 

estimated that many of the people who become newly insured will be covered by 

Medicaid, which pays relatively low net prices for drugs. CBO’s analysis did not 

include a separate estimate of such provisions’ effects on drug prices; instead, 

those effects were subsumed in the overall estimate of the cost of expanding 

insurance coverage. 

Effects on Drug Prices in the Private Sector 

Although CBO anticipated that the average prices paid by pharmacies for certain 

Medicare and Medicaid drugs would increase because of the health care 

legislation, the agency expected that some private purchasers would be affected 

by those increases and others would not. Uninsured individuals, who do not have 

health plans negotiating prices on their behalf, would probably face those price 
Honorable Paul Ryan 

Page 8 

increases—although the effects might be offset in part by existing discount 

programs offered by manufacturers for uninsured people with lower income. 

However, for people covered by employment-based health plans, CBO expected 

that net prices would probably not increase because those plans would be able to 

negotiate larger rebates that roughly offset the higher prices paid by pharmacies. 

Specifically, manufacturers were presumably planning to charge net prices that 

maximized their profits under prior law, and those calculations would be largely 

unaffected by the new legislation; thus, the likely outcome of negotiations over 

prices and rebates under the legislation would be the same net prices. (By 

contrast, the new discounts and rebates for purchases under Medicare and 

Medicaid will reduce manufacturers’ profits, an effect they will presumably seek 

to offset subject to the constraints discussed above.) 

Certain provisions in the health care legislation will encourage manufacturers to 

negotiate larger rebates with private purchasers. The best-price formula in 

Medicaid’s rebate program has discouraged manufacturers from offering rebates 

larger than the minimum Medicaid rebate to certain private purchasers such as 

health maintenance organizations and mail order pharmacies, because any such 

rebates would have automatically triggered a larger rebate to Medicaid. However, 

the provisions in the legislation that increase Medicaid’s minimum rebate 

effectively give manufacturers greater flexibility to offer larger rebates on existing 

drugs to a subset of private purchasers. 

If you have questions about this analysis, please contact me or CBO staff. The 

CBO staff contacts are Ellen Werble and Rebecca Yip. 

Sincerely, 

Douglas W. Elmendorf 

Director 

cc: Honorable John M. Spratt Jr. 

Chairman 
March 19, 2010 

Comparison of Projected Enrollment in Medicare Advantage Plans and 

Subsidies for Extra Benefits Not Covered by Medicare Under Current Law and 

Under Reconciliation Legislation Combined with H.R. 3590 as Passed by the Senate 

(based on draft legislative language and modifications discussed with staff)

Current Law 

Under current law, CBO projects that the number of Medicare beneficiaries enrolled in 

Medicare Advantage plans will grow from 10.6 million in 2009 to 13.9 million in 2019. 

We also project that the amount by which payments to those plans will exceed their bids 

will grow from an average of $87 per member per month in 2009 to $135 per member per 

month in 2019. Medicare Advantage plans use those additional payments to provide their 

enrollees with extra benefits that are not covered by Medicare: either health care services, 

such as vision care or dental care, or subsidies of beneficiaries’ out-of-pocket costs for 

Part B or Part D premiums or cost sharing for Medicare-covered benefits. CBO does not 

have a basis for projecting the distribution of additional benefits among those categories.

The “rebate”—that is, the amount of the subsidy that plans receive to provide extra 

benefits—depends on the difference between the plan’s bid and a benchmark that is set 

using a formula. The benchmarks currently range from about 100 percent to over 150 

percent of local per capita spending in the fee-for-service (FFS) sector. The difference 

between bids and benchmarks tends to be largest in areas where plans are able to provide 

Medicare-covered services for less than the average cost per enrollee in the FFS sector. If 

the plan’s bid is below the benchmark, Medicare pays the plan 75 percent of the 

difference between the bid and benchmark to subsidize extra benefits not covered by 

Medicare. On average, CBO projects that rebates to plans in areas with bids that 

currently are below FFS costs will average $172 per member per month in 2019. By 

contrast, CBO projects that rebates to plans in areas where bids are above FFS costs will 

average $98 per member per month in 2019 (see attached table). 

Proposed Law

Under the legislation, benchmarks would continue to be tied to local FFS spending, with 

benchmarks ranging from 95 percent of local FFS spending in areas with relatively high 

FFS spending to 115 percent in areas with relatively low FFS spending. Similar to current 

law, a plan that bids below the benchmark would receive a rebate equal to 75 percent of 

the difference between the bid and the benchmark, which it would be required to pass 

through to its enrollees in the form of health care services not covered by Medicare or 

reduced cost sharing. (Plans could no longer use the rebates to subsidize Part B or Part D 

premiums.) Plans that bid above the benchmark would be required to charge the 

difference to its enrollees. In addition, plans that achieve certain quality ratings would 

receive additional payments, as would plans that are located in particular counties. Plans 

would be required to use those additional payments to provide additional benefits. Those 
March 19, 2010 

changes would be phased in over the 2011-2017 period. The proposal would also 

permanently extend the authority of the Secretary to adjust risk scores to account for 

differences in coding patterns between Medicare Advantage plans and FFS providers. 

CBO’s preliminary estimate is that enacting the proposed changes would reduce federal 

spending by $117 billion over the 2010-2019 period. (A reduction in gross Medicare 

spending of $132 billion would be offset, in part, by a $15 billion reduction in Part B 

premium receipts.) Nationwide, the average value of the extra benefits not covered by 

Medicare (that is, rebates plus additional payments) would be about $67 per member per 

month in 2019. That average would be about $48 in areas with bids currently above FFS 

costs and $79 in areas with bids below FFS costs. CBO estimates that enrollment in 

Medicare Advantage plans in 2019 would be 4.8 million lower than we project under 

current law, with most of those reductions (2.7 million) occurring in areas where bids 

currently are above FFS costs.
Based on draft legislative language and modifications discussed with staff

Under Current Law

All Areas 10.6 13.9 87 135

Areas with Bids that Average Less than 100 Percent of 

Spending Per Beneficiary in the Fee-for-Service Sector 4.7 6.9 120 172

Areas with Bids that Average More than 100 Percent of 

Spending Per Beneficiary in the Fee-for-Service Sector 5.9 7.0 61 98

Under Proposed Law

All Areas -35 -4.8 -117 a67

Areas with Bids that Average Less than 100 Percent of 

Spending Per Beneficiary in the Fee-for-Service Sector -31 -2.1 -57 79

Areas with Bids that Average More than 100 Percent of 

Spending Per Beneficiary in the Fee-for-Service Sector -39 -2.7 -60 48

Note: Under current law, extra benefits include health care services not covered by Medicare, such as vision care and dental care, and

subsidies of beneficiaries' out-of-pocket costs for Part B or Part D premiums or cost sharing for Medicare-covered benefits.

Under the Patient Protection and Affordable Care Act, extra benefits would include health care services not covered by Medicare and

subsidies of beneficiaries' out-of-pocket costs for cost sharing for Medicare-covered benefits.

a. The estimate of a $117 billion net reduction in Medicare spending over the 2010-2019 period reflects a $132 billion reduction in Medicare 

payments that would be offset, in part, by a $15 billion reduction in Part B premium receipts.

Net Reduction in 

Medicare Spending 

2010-2019

Average Subsidy of Extra 

Benefits Not Covered by 

Medicare, 2019

 Enrollment in MA 

Plans (millions)

2009

Percent Millions Billions of Dollars Dollars Per Month

Reduction in 

Enrollment in MA 

Plans, 2019

2019

Preliminary Estimate of Effects of the Medicare Advantage (MA) Provisions of Reconciliation Legislation Combined

with H.R. 3590 as Passed by the Senate on Enrollment in MA Plans and on Federal Subsidies for Enrollees

in MA Plans of Benefits Not Covered by Medicare

Average Subsidy of Extra Benefits Not Covered by Medicare 

(dollars per month)

2009 2019

Congressional Budget Office 3/19/2010
Distribution Among Types of Providers of Savings from the Changes to 

Updates in Section 1105 of Reconciliation Legislation and Sections 3401 and 

3131 of H.R. 3590 as Passed by the Senate. (Based on draft legislative 

language and modifications discussed with staff.)

10-Year Change in Spending (in billions of dollars)

Reconciliation 

Language Combined 

with H.R. 3590 as 

Passed by the Senate

Hospitals (IPPS, HOPD, IRF, IPF, LTCH) -112.9

SNF -14.6

Hospice -6.8

All Other Part B (DME, P&O, Other, Labs, 

ASC, Ambulance, ESRD) -22.3

Home Health (includes effects of changes 

in payment rates under section 3131) -39.7

Total -196.3

Notes:

ASC = Ambulatory surgical center; DME = Durable medical equipment; 

ESRD = End-stage renal disease; HOPD = Hospital outpatient department; 

IPPS = Inpatient prospective payment system; IPF = Inpatient psychiatric 

facility; IRF = Inpatient rehabilitation facility; LTACH = Long-term acute-care 

hospital; P&O = Prosthetics and orthotics; SNF = Skilled nursing facility.
 March 19, 2010

Comparison of Projected Medicare Part D Premiums Under Current Law and 

Under Reconciliation Legislation Combined with H.R. 3590 as Passed by the Senate 

(based on draft legislative language and modifications discussed with staff)

We have received inquiries regarding the change in Medicare Part D premiums that 

would result from certain provisions contained in the amendment in the nature of a 

substitute to H.R. 4872, the Reconciliation Act of 2010.

The Patient Protection and Affordable Care Act (PPACA) introduced a manufacturer 

discount program in Medicare Part D for brand-name drugs purchased in the coverage 

gap, often referred to as the “doughnut hole.” CBO assumes this policy would increase 

the number of Part D beneficiaries receiving catastrophic coverage, since prescription 

drugs would be more affordable to the beneficiary, causing Part D spending to increase 

overall. As a result of these changes, we estimate that Part D premiums would increase 

by about 3 percent starting in 2011. Compared to our baseline assumptions, the Part D 

premium would be about 3 percent higher through 2019. 

The reconciliation bill would make additional changes to the structure of the Part D 

benefit. In addition to the discount program provided by manufacturers, Section 1101 

would require that Part D plans cover more prescription drug costs for non-low income 

subsidy individuals in the doughnut hole over time. This policy change further increases 

Part D spending, compared to PPACA, because the benefit is more generous. 

Beneficiaries and the federal government share in program costs, which leads to an 

increase in premiums. According to CBO’s preliminary estimate, enacting those changes 

would lead to an average increase in premiums for Part D beneficiaries of about 4 percent 

in 2011, rising to about 9 percent in 2019. This estimate is based on draft legislative 

language with clarifications from staff.

The incremental difference in premiums between PPACA and reconciliation of 1 percent 

in 2011 and 6 percent in 2019 can largely be attributed to the policy of closing the 

doughnut hole. 

However, it is important to note that beneficiaries’ out-of-pocket spending on 

prescription drugs apart from those premiums would fall, on average, as would their 

overall out-of-pocket drug spending including premiums in both scenarios – PPACA and 

PPACA including changes included in the reconciliation language. 

For additional information regarding how CBO has estimated provisions related to 

Medicare Part D, please see CBO’s letter to Congressman Camp, issued on August 28, 

2009 (http://www.cbo.gov/ftpdocs/105xx/doc10543/08-28-MedicarePartD.pdf).
CONGRESSIONAL BUDGET OFFICE 

Payments of Penalties for Being Uninsured 

Under the Patient Protection and Affordable Care Act 

Revised1– April 30, 2010 

Beginning in 2014, the Patient Protection and Affordable Care Act (Public Law 111-148), in 

combination with the Health Care and the Education Reconciliation Act of 2010 (Public Law 

111-152), requires most residents of the United States to obtain health insurance and imposes a 

financial penalty for being uninsured. That penalty will be the greater of a flat dollar amount per 

person that rises to $695 in 2016 and is indexed by inflation thereafter (the penalty for children 

will be half that amount and an overall cap will apply to family payments) or a percentage of the 

household’s income that rises to 2.5 percent for 2016 and subsequent years (also subject to a 

cap). 

The Congressional Budget Office (CBO) and the staff of the Joint Committee on Taxation (JCT) 

have estimated that about 21 million nonelderly residents will be uninsured in 2016, but the 

majority of them will not be subject to the penalty. Unauthorized immigrants, for example, are 

exempted from the mandate to obtain health insurance. Others will be subject to the mandate but 

exempted from the penalty—for example, because they will have income low enough that they 

are not required to file an income tax return, because they are members of Indian tribes, or 

because the premium they would have to pay would exceed a specified share of their income 

(initially 8 percent in 2014 and indexed over time). CBO and JCT estimate that between 13 

million and 14 million of the uninsured in 2016 will qualify for one or more of those exemptions. 

Of the remaining 7 million to 8 million uninsured, some individuals will be granted exemptions 

from the penalty because of hardship, and others will be exempted from the mandate on the basis 

of their religious beliefs. Among the uninsured who do not obtain an exemption, many will voluntarily report on their tax returns that they are uninsured and pay the amount owed. However, 

other individuals will try to avoid making payments. Therefore, the estimates presented here 

account for likely compliance rates, as well as the ability of the Internal Revenue Service (IRS) 

to administer and collect the penalty. After accounting for all of those factors, CBO and JCT 

estimate that about 4 million people will pay a penalty because they will be uninsured in 2016 (a 

figure that includes uninsured dependents who have the penalty paid on their behalf). 

CBO and JCT estimate that total collections from those penalties will be about $4 billion per 

year over the 2017–2019 period. The attached table shows the distribution of payments that are 

projected to be made for being uninsured in 2016 (which the IRS will actually collect in 2017) 

 

1 Compared with the version that CBO released on April 22, this revised document simply 

provides additional information about the total number of people who are expected to qualify for 

certain exemptions from the insurance mandate or its associated penalty. No changes have been 

made to the estimate that about 4 million people will pay a penalty because they will be 

uninsured in 2016 or to any of the other numbers reported in the text or the attached table.
by income measured as a percentage of the federal poverty level (FPL). In general, households 

with lower income will pay the flat dollar penalty, and households with higher income will pay a 

percentage of their income. In 2016, households with income that exceeds 400 percent of the 

FPL are estimated to constitute about one-third of people paying penalties and to account for 

about two-thirds of the receipts from those penalties. 
Estimated Distribution of Individual Mandate Penalties 4/22/2010

Under the Patient Protection and Affordable Care Act (PL 111-148)

Combined with the Health Care and Education Reconciliation Act (PL 111-152)

Calendar Year 2016

Adjusted Gross Income Individual Mandate Penalties

Relative to the Total Share of Total Share of

Federal Poverty Level (FPL) Payers Payers Payments Payments

(millions) (%) ($ billions) (%)

Less than 100% 0.4 9 0.2 4

100% to 200% 0.6 16 0.3 7

200% to 300% 0.8 21 0.5 11

300% to 400% 0.7 18 0.5 13

400% to 500% 0.5 12 0.5 11

Greater than 500% 0.9 24 2.3 55

 Total 3.9 100 4.2 100

 

Source: Congressional Budget Office and the staff of the Joint Committee on Taxation.

Notes: 

a) Individual penalty payments are classified by the income of the tax return filing unit.

b) In 2016, the FPL is projected to equal about $11,800 for a single person and about $24,000 for a family of four. 

c) Components may not sum to totals due to rounding. 

d) Liabilities incurred for being uninsured in calendar year 2016 would be paid in fiscal year 2017. 

e) Counts of payers include dependents who have payments made on their behalf. 

Earlier Proposals

Prior to enactment of PPACA in March 2010, the Congress considered a number of other 

proposals that would have made major changes regarding the provision of health insurance 

and payments for health care through federal programs. CBO provided analyses and cost estimates for many of those proposals, including these: 

1. A letter to Representative Dave Camp, dated July 26, 2009, providing information about 

the impact of the specifications related to health insurance coverage that were reflected in 

H.R. 3200, the America’s Affordable Health Choices Act. (CBO had provided a preliminary analysis of those specifications in a letter issued on July 14, 2009, after that proposal 

was released by several committees of the House of Representatives.) Among other topics, 

the letter provides information about CBO’s estimate of the proposal’s impact on enrollment in employment-based health insurance, in the proposed “public plan,” and in 

Medicaid.

2. A letter to Senator Michael B. Enzi, dated September 10, 2009, responding to questions 

about the Affordable Health Choices Act, which was considered by the Senate Committee 

on Health, Education, Labor, and Pensions (HELP). (CBO had issued a preliminary and 

partial analysis of that legislation on July 2, 2009, shortly after it was introduced.) The letter provides information about the potential costs of expanding eligibility for Medicaid, 

the impact of the proposed “public plan,” and the effects of the proposal on employers, 

employees, and national spending for health care.

3. A preliminary analysis of the Affordable Health Care for America Act (H.R. 3962), which 

was sent to House Ways and Means Committee Chairman Charles B. Rangel on October 

29, 2009; JCT’s detailed estimates for the revenue provisions of that legislation are also 

included here. After some modifications, that legislation was passed by the House of Representatives. (CBO’s final cost estimate for that bill—including its modification through a 

manager’s amendment—differed somewhat from the preliminary estimate included here 

but provided less information about the various effects of the bill; that final estimate was 

released on November 5, 2009, and was updated on November 6 and November 20.) 

4. A preliminary analysis of an amendment in the nature of a substitute for H.R. 3962, 

which was sent to House Republican Leader John A. Boehner on November 4, 2009. 

That legislation represented an alternative approach for changing the health care and 

health insurance systems.

5. A response to several questions regarding Medicare’s payments to physicians and the budgetary impact of enacting changes in those payments along with H.R. 3962, which was 

sent to Representative Paul Ryan on November 19, 2009. 
EARLIER PROPOSALS

6. A cost estimate for the legislation that would become H.R. 3590, the Patient Protection 

and Affordable Care Act, which was sent to Senate Majority Leader Harry Reid on 

December 19, 2009; JCT’s detailed estimates for the revenue provisions of that legislation 

are also included here. (CBO and JCT subsequently produced estimates of the impact of 

H.R. 3590 as passed by the Senate; those estimates differed modestly from the original 

estimates and were released on March 11, 2010.) 

7. A subsequent correction regarding the cost estimate for H.R. 3590—affecting only the 

estimate of the legislation’s impact on federal budget deficits after 2019—which was sent 

to Senate Majority Leader Harry Reid on December 20, 2009. 

CBO provided several other analyses of major legislative proposals that are not included in 

this volume but are available on CBO’s Web site. In addition to the items noted parenthetically above, those publications included other analyses of H.R. 3200 and of the legislation 

considered by the Senate HELP Committee, as well as analyses of proposals considered by the 

Senate Finance Committee in September and October of 2009 and of PPACA as originally 

introduced in the Senate in November 2009. 
www.cbo.gov

CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director

U.S. Congress

Washington, DC 20515

July 26, 2009

Honorable Dave Camp

Ranking Member

Committee on Ways and Means

U.S. House of Representatives

Washington, DC 20515

Dear Congressman:

The Congressional Budget Office (CBO) and the staff of the Joint Committee on

Taxation (JCT) recently completed a preliminary analysis of the specifications

related to health insurance coverage that are reflected in the America’s Affordable

Health Choices Act, which was released by the House Committee on Ways and

Means on July 14, 2009.

Among other things, those specifications would establish a mandate for most legal

residents to obtain health insurance, significantly expand eligibility for Medicaid,

regulate the pricing and terms of private health insurance policies, set up

insurance “exchanges” through which certain individuals and families could

receive federal subsidies to reduce the cost of purchasing insurance, and offer a

“public plan” option similar to Medicare through those exchanges. For reasons

outlined in CBO’s July 14 letter summarizing that analysis—and in our letter of

July 17, which took into account the other parts of the legislation that would raise

taxes or reduce other spending—our analysis to date does not represent a formal

or complete cost estimate for the draft legislation.

The attached analysis responds to your request for additional information about

the effects of the specifications regarding health insurance coverage. In particular,

you asked about the effects on enrollment in private coverage, in the new public

plan, and in Medicaid; the effects on private-sector insurance premiums and the

labor market; the longer-term cost of the plan; and the allocation of its net budget

impact between outlays and revenues. Because of the complexity of the changes

that have been proposed and their potential effects, we are unable to address all

aspects of every question that you raised.
Honorable Dave Camp

Page 2

I hope this information is helpful to you. If you have any further questions, please

contact me or CBO staff. The primary staff contacts for this analysis are Philip

Ellis and Holly Harvey.

Sincerely,

Douglas W. Elmendorf

Director

Identical letters sent to the Honorable Joe Barton, the Honorable John Kline, and

the Honorable Paul Ryan.

Attachment

cc: Honorable Charles B. Rangel

Chairman
Congressional Budget Office

Additional Information Regarding the Effects of Specifications

in the America’s Affordable Health Choices Act Pertaining to

Health Insurance Coverage

July 26, 2009

The Congressional Budget Office (CBO) and the staff of the Joint Committee on

Taxation (JCT) recently completed a preliminary analysis of the specifications related to

health insurance coverage that are reflected in the America’s Affordable Health Choices

Act. That analysis, which was transmitted in a letter to the House Committee on Ways

and Means, was released on July 14, 2009; subsequent analysis, which took into account

the other parts of the legislation that would raise taxes or reduce other spending, was

released on July 17. Among other things, those specifications would establish a mandate

for most legal residents to obtain health insurance, significantly expand eligibility for

Medicaid, regulate the pricing and terms of private health insurance policies, set up

insurance “exchanges” through which certain individuals and families could receive

federal subsidies to reduce the cost of purchasing insurance, and offer a “public plan”

option similar to Medicare through those exchanges.

This report provides additional information about the effects of the specifications in that

act regarding health insurance coverage. In particular, it examines their likely effects on

enrollment in private coverage, in the new public plan, and in Medicaid; the effects on

private-sector insurance premiums and the labor market; the longer-term cost of the plan;

and the allocation of its net budget impact between outlays and revenues. For reference,

the table released on July 14 summarizing the preliminary analysis of the coverage

specifications is included in this report. The report, however, does not represent a formal

or complete cost estimate for the draft legislation.

Effects on Enrollment in Private Coverage

Compared with what would happen under current law, the legislation would induce some

people to move out of employment-based coverage and others to move into employmentbased coverage, and our estimate of the net effect of those changes is shown in the

attached table. A number of questions have arisen about that estimate—particularly

regarding our conclusion that only a small share of firms would choose to stop offering

health insurance to their workers once the new subsidies became available in the

insurance exchanges. Several factors contribute to that conclusion:

• Workers who get insurance through their employer receive a significant subsidy

because the cost of that insurance is not treated as taxable earnings for the worker and

thus avoids both income and payroll taxes. In most cases, that exclusion applies to the

portion of the premium that workers pay as well as the amount the employer
2

contributes. On average, that tax exclusion gives workers a subsidy of roughly

30 percent for purchasing insurance through their employer—a subsidy that would be

forgone if the employer chose not to offer coverage and the workers instead obtained

coverage in the new insurance exchanges.

• In general, firms that decided to stop sponsoring insurance coverage for their workers

would not be able to reduce their operating costs because, in a competitive labor

market, they would have to offer higher wages and other forms of compensation

instead. Indeed, workers might be particularly motivated to demand such increases

under the proposal because they would be required to obtain insurance. That added

compensation would generally be taxable. (This consideration and the preceding one

help explain why most workers are offered health insurance by their employers

today.)

• Under the proposal, nearly 90 percent of workers would be employed by firms that

would either have to offer qualified coverage and contribute a significant share

toward the premium or pay a tax equal to 8 percent of their total payroll. That “playor-pay” penalty would constitute a substantial portion of the average cost of providing

insurance coverage, which has been estimated at about 12 percent of payroll currently

(but which would rise over time). In dollar terms, the penalty would obviously vary

depending on a firm’s payroll; for example, a firm with average wages of $40,000 per

year that did not offer qualified coverage would have to pay a penalty of $3,200 per

worker. Moreover, that penalty would make no direct contribution to those workers’

insurance costs; they would then need to obtain coverage from another source in

order to fulfill the individual mandate.

• Many firms have a mix of employees with differing levels of individual or family

income—some of whom would qualify for relatively generous subsidies in the new

insurance exchange and some of whom would not. Consistent with the available

evidence, we anticipate that an employer would generally take into account the

effects on all of its workers in deciding whether or not to offer coverage. In most

cases, having their employer offer coverage would be the best option for the

workforce overall, even with the new insurance exchanges.

• Finally, the available evidence indicates that in making decisions about offering

insurance, many firms are not very responsive to the availability of outside options

for their workers to obtain coverage; in particular, that responsiveness tends to

decline as firm size increases. One reason is that larger firms have relatively low

administrative costs that would generally make it advantageous for their workers to

keep that coverage rather than pay higher administrative costs for a plan in an
3

insurance exchange. Because larger firms account for the lion’s share of all

employment-based coverage, that lack of responsiveness limits the likely extent of

any erosion in coverage.1

In most cases, the combination of the subsidy from the current tax exclusion and the

penalty for firms that did not offer qualified coverage would provide a strong financial

inducement for employers to continue offering coverage to their workers.2 To give an

example in today’s terms, the average employment-based health insurance plan currently

has a premium of about $5,000 for single coverage and $13,000 for family coverage. The

subsidy provided by the tax exclusion is thus worth about $1,500 for single coverage and

about $4,000 for family coverage, on average. For a firm with average wages of $40,000,

the $3,200 penalty combined with the subsidy from the tax exclusion would roughly

equal the total amount of the single premium and would constitute more than half of the

typical cost of family coverage. Only workers who would receive larger percentage

subsidies in the exchanges would be better off if their employer stopped offering

coverage—and that would be a distinct minority of workers.3

Taking those considerations into account, some firms would probably decide not to offer

coverage, CBO and the JCT staff estimate. That option would be most attractive to firms

with lower-wage workers—both because the play-or-pay penalty for not offering

coverage would be smaller in dollar terms and because their workers would be eligible

for larger subsidies in the insurance exchanges (or through Medicaid). An additional

factor is that smaller firms (those with an annual payroll of less than $400,000) would

either be exempt from the play-or-pay penalty or would pay a lower tax rate. However,

an offsetting consideration is that small employers with low-wage workers would be

eligible for a tax credit covering up to 50 percent of the employer’s contribution toward

health insurance premiums. On balance, CBO and the JCT staff estimate that, in 2016,

about 3 million people (including spouses and dependents of workers) who would be

covered by an employment-based plan under current law would not have an offer of

coverage under the proposal.

Other people would have an offer of coverage from an employer but would choose to

make use of the subsidies that would be available in certain cases through the exchanges.

 

1 For further discussion of the factors affecting employer coverage, see Congressional Budget Office, Key

Issues in Analyzing Major Health Insurance Proposals (December 2008), pp. 4–8 and 43–48; and CBO’s

Health Insurance Simulation Model: A Technical Description, Background Paper (October 2007).

2 In the legislation considered by the Senate Committee on Health, Education, Labor, and Pensions, the

penalty amounts per worker are much smaller. However, that proposal would also provide less inducement

for employers to stop offering coverage, because it would provide no new subsidies for insurance coverage

for individuals with income below 150 percent of the federal poverty level.

3 Over time, as the costs of health care rose more rapidly than payrolls, the penalties would gradually

decline in importance relative to the tax exclusion and exchange subsidies. That evolution is incorporated

in CBO’s analysis and helps explain why the estimated effect of the proposal on employer coverage

changes gradually over time.
4

In 2016, nearly 3 million people who would be covered under an employment-based plan

under current law—and who could be covered by that plan under the proposal—would

choose instead to obtain coverage in the exchanges because the employer’s offer would

be deemed unaffordable and they would therefore be eligible to receive subsidies through

the exchanges. In addition, some part-time employees, who could receive subsidies via an

exchange even though they had an employer’s offer of coverage, would choose to do so.

All told, we estimate that, in 2016, about 9 million people who would otherwise have had

employer coverage would not be enrolled in an employment-based plan under the

proposal.

The net effect of the proposal on employment-based health insurance reflects larger

changes in the other direction, however. We estimate that about 12 million people who

would not be enrolled in an employment-based plan under current law would be covered

by one in 2016, largely because the mandate for individuals to be insured would increase

workers’ demand for insurance coverage through their employer. On net, therefore, about

3 million more people would have their primary coverage through an employer under the

proposal than under current law (as shown in the attached table).

Enrollment in the Public Plan

A related question concerns how many firms would provide coverage to their workers but

would do so by letting their workers purchase coverage in the insurance exchanges—and,

in particular, how many of those enrollees would end up in the new public plan. Under

the proposal, firms with 20 or fewer workers would be given the option to let their

workers buy coverage through the insurance exchanges starting in 2014, and the official

overseeing the exchanges would be allowed to let larger employers purchase coverage in

that way starting in 2015. In those cases, the workers would not receive exchange

subsidies but would instead be subsidized through the tax exclusion as under current law;

as a result, CBO’s table showing the effect of the proposal on sources of insurance

coverage counts those enrollees as being covered by employment-based insurance rather

than as exchange enrollees.

For the preliminary estimate of the proposal, CBO and the JCT staff assumed that only

firms with 50 or fewer employees would be permitted to buy coverage through the

exchanges, and we estimated that about 6 million workers and their dependents would

obtain coverage in that way. We also estimated that about one third of those enrollees

would choose the public plan—an assessment that is consistent with our overall estimate

of the share of people in the exchanges choosing that plan.

What options employers would have under the proposal depends on whether the official

overseeing the insurance exchanges would give larger firms access to the exchanges, and

predicting what that official would do is difficult. On the one hand, workers at some

firms would find that option attractive, particularly in areas where the public plan has

relatively low premiums, and they might apply pressure to be admitted to the exchanges.

On the other hand, providers of health care and private insurers might be opposed to

expanding access to the public plan, and they might apply pressure to keep larger firms
5

out of the exchanges. In addition, the official might be concerned about the potential for

adverse selection into the exchanges, which could arise if employers choosing to take

advantage of the option had older or less healthy workers.

If we assumed that workers at larger firms would be allowed to purchase coverage

through the exchanges, our estimate of the number of enrollees involved would

undoubtedly be greater than 6 million, but we have not estimated the magnitude. Analysts

at the Lewin Group recently estimated that if all employers were given access to the

insurance exchanges, more than 100 million people would end up enrolling in the public

plan.4 For several reasons, we anticipate that our estimate of the number of enrollees in

the public plan would be substantially smaller than the Lewin Group’s, even if we

assumed that all employers would have that option.

One consideration that would affect our analysis is that large employers would generally

have lower administrative costs for health insurance than would plans offered in the

exchanges, because (under the proposal) those plans would need to sign up enrollees

individually; as a result, employees of large firms would be less likely than those of small

firms to find the option of purchasing coverage through the exchange attractive, holding

other factors equal. Although we assumed that the public plan would have somewhat

lower administrative cost per enrollee than would private plans in the exchanges, the

public plan would probably have to incur much of the same cost in order to attract and

retain members.

More generally, the Lewin analysis uses a much larger gap than does our analysis

between the premium of the public plan and the premiums of the private plans against

which it would be competing. As indicated in our letter of July 14, we estimate that the

public plan’s premium would, on average, be about 10 percent lower than that of a

typical private plan offered in the insurance exchanges. That estimate is based in part on

available data from the Medicare Advantage program about the difference in costs

incurred by private plans and the traditional Medicare plan to provide the same set of

benefits. Indeed, the most recent analysis of that difference concluded that the costs of the

traditional Medicare plan were only 2 percent lower, on average, than the costs of private

plans participating in Medicare to provide the same benefits (though that difference

varied geographically and by the type of private plan that was offered).5

Another factor relevant to our estimate is our assessment that some providers would

choose not to participate in the public plan, which would discourage some enrollees from

choosing that plan despite its lower average premium. Even so, we expect that the

 

4 Statement of John Sheils, Vice President, The Lewin Group, before the House Committee on Energy and

Commerce, The Impact of the House Health Reform Legislation on Coverage and Provider Incomes (June

25, 2009).

5 See Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy (March

2009), Chapter 3. CBO’s larger estimate of the gap in premiums between the public plan and private plans

under the proposal also incorporates expected differences in such factors as benefit management and

providers’ payment rates.
6

provider network would be large enough to attract a sizable minority of participants in the

exchanges.

Because all of these factors are uncertain, estimating enrollment in the public plan is

especially difficult—as we emphasized in our earlier letter. Given our assessment of the

likely difference in premiums, however, offering more firms the option of letting their

workers purchase insurance through the exchanges would probably have a limited effect

on the proposal’s net budgetary impact. As noted above, workers with employment-based

insurance who obtained coverage through the exchanges would receive no exchange

subsidies and would have the same tax preference as if they had obtained coverage

outside the exchanges. Thus, if more employers purchased coverage through the

exchanges than we anticipate and purchased somewhat less expensive insurance via the

public plan, the principal effect on federal deficits is that those employers would end up

increasing their workers’ taxable compensation and thereby would generate slightly

higher tax revenues. Greater enrollment in the public plan would also increase the plan’s

outlays and premium collections, which would be included in the federal budget, but as

long as the public plan charged premiums that covered its costs (as it is supposed to do

under the proposal), those amounts would be offsetting.

Effects of the Proposed Medicaid Expansion

A further question is the number of people who we estimate would enroll in Medicaid

under the proposal that would have private coverage under current law. CBO does not

anticipate a substantial shift from private insurance to Medicaid. Specifically, we

estimate that about 1 million people who would otherwise have employment-based

insurance or individually purchased coverage would end up enrolling in Medicaid in

2016. We also estimate that about 10 million people would newly enroll in Medicaid

under the proposal, but the great majority of them would be people who would otherwise

be uninsured rather than privately insured. As a result, our estimated rate of crowd-out—

that is, the share of people gaining Medicaid coverage who would otherwise be insured

privately—is about 10 percent under this proposal.

Although the proposal would sharply increase the number of people eligible for

Medicaid, several factors help to explain the relatively low rate of crowd-out of private

insurance that we expect:

• The expansion of Medicaid would encompass relatively poor people (including some

childless adults whose income is well below the poverty level), who are less likely

than people with higher income to have private insurance coverage. Our analysis

indicates that only about a quarter of the people who would be made newly eligible

for Medicaid under the proposal would have private coverage under current law.

• Unlike prior expansions of public coverage on which estimates of crowd-out are

generally based, this proposal would impose a considerable penalty on employers that

did not offer qualified insurance and contribute a substantial share of the premium.
7

Those requirements would help offset the incentives under the proposal for employers

to cease offering coverage as a result of the expansion in Medicaid eligibility.

• Unlike past expansions of Medicaid, the proposal would include a requirement for

people to obtain insurance. As a result, those who would be eligible for Medicaid

(whether under current law or because of the expansion) and who would otherwise be

uninsured would be more likely to enroll in that program.

In sum, because of the specific features of the proposal, the number of people who might

leave private coverage for Medicaid would be relatively small, and the number of people

who would newly enroll in Medicaid would be relatively large—so together, those

features of the proposal would reduce the expected rate of crowd-out.6

Effects on Private-Sector Premiums

Many observers have asked about the effect of the proposal on health insurance

premiums in the private sector outside the insurance exchanges. After 2012, all newly

issued policies purchased by individuals would have to be bought through the insurance

exchanges; as a result, the proposal’s effects on premiums outside the exchanges would

be seen in premiums for coverage provided by or through employers (which is the

predominant source of insurance for the nonelderly population under current law and

would remain so, in our estimation, under this proposal). The proposal contains a number

of elements that could affect those premiums, both directly and indirectly—some of

which could cause the premiums to increase and some of which could cause them to

decrease. Although the direction of the overall impact is not certain, the magnitude of the

effect on average premiums would probably be modest.

Effects on the Risk Pool

One concern that has been expressed about proposals to establish and subsidize coverage

through the new insurance exchanges is that firms would see their relatively young or

healthy enrollees switch to those plans. If that happened, the average costs for covering

the remaining enrollees would be higher. Under the proposal, however, full-time workers

with an offer of coverage from their employer would generally be prohibited from

receiving subsidies through the exchanges—a restriction known as a “firewall,” which we

believe would be largely effective.7 Moreover, the proposal would allow premiums in the

insurance exchanges to vary only by age and then only to a limited degree, so the plans

available in the exchanges might not be substantially more attractive to younger and

 

6 For more information about the potential effect of expanding public insurance coverage on the number of

people with private insurance, see Congressional Budget Office, The State Children’s Health Insurance

Program (May 2007), pp. 7–13.

7 An exception would be granted for full-time workers who had to pay more than 11 percent of their

income for their employer’s insurance. In addition, part-time workers could receive subsidies via the

exchanges regardless of the availability or cost of coverage through their employers. As noted above, CBO

and the JCT staff estimated that several million workers would take advantage of those exceptions.
8

healthier workers than they would be for other workers—reducing the incentive to

circumvent the firewall.

At the same time, CBO and the JCT staff estimate that several million more people, on

balance, would enroll in employment-based insurance than is projected under current

law. The resulting pool of enrollees would be somewhat healthier, on average, than is the

pool of enrollees in employment-based insurance today; as a consequence, the average

cost of covering those enrollees would be several percent lower than under current law

(holding other factors equal). The extent and manner in which that change would affect

premiums for employment-based coverage is more difficult to determine; for example,

that effect might be seen primarily in the premiums for single coverage (rather than

family coverage) because most of the younger and healthier enrollees who would sign up

for employment-based coverage as a result of the proposal would choose that type, but

how premium costs are allocated within firms is less clear. Also, the main reason some

people would be paying less for their coverage is because newly enrolled people would

be making premium payments they would not otherwise have made—so the changes in

premiums would largely represent a transfer among workers rather than an improvement

in the efficiency of employment-based insurance plans.

The proposal’s restrictions on insurance markets could also affect premiums for

employment-based coverage. In particular, the proposal would prohibit insurers from

varying the premiums charged to employers to reflect differences in the health status or

likely costs of their employees. Existing policies would be exempt from that requirement

through 2017 but would then have to come into compliance with that prohibition.

(Insurers would still be permitted to adjust premiums, albeit to a limited degree, to reflect

the age of the enrollees.) That change would not apply to employers who chose to bear

the financial risk of providing health insurance to their workers, but it would affect

employers who purchased such coverage from an insurer. Relative to current law (under

which relatively few states impose the same restrictions on variation in premiums), those

limits might not have a substantial effect on the average premium paid by employers, but

they would tend to increase premiums for firms with relatively healthy workers and

decrease them for firms with relatively unhealthy workers.

Effects of Cost Shifting

A less direct way in which the proposal could cause private-sector premiums to change is

by affecting the extent of “cost shifting”—a phenomenon in which lower rates paid to

health care providers for some patients (such as uninsured people or enrollees in

government insurance programs) can lead to higher payment rates for others (privately

insured individuals). The proposal would have opposing effects on the pressures for such

cost shifting to occur.

On the one hand, the proposal’s expansion of eligibility for Medicaid and other

provisions would substantially increase enrollment in that program (by an estimated

10 million to 11 million people in the latter part of the 2010–2019 period). In addition,

many provisions of the proposal would reduce payments to hospitals and other providers
9

under Medicare. Furthermore, the legislation would establish a public plan to be offered

in the insurance exchanges; that plan would be set up by the Secretary of Health and

Human Services and pay Medicare-based rates to providers of health care. By

themselves, those changes would tend to increase the pressure on providers to shift costs

to private payers.

On the other hand, we estimate that the proposal would ultimately reduce the uninsured

population by roughly two-thirds, which would greatly attenuate the pressure to shift

costs that arises today when uncompensated or undercompensated care is provided to

people who lack health insurance. One recent estimate indicates that hospitals provided

about $35 billion in such care in 2008—an amount that would grow under current law but

would be expected to decline considerably under the proposal. (Recent evidence also

indicates that physicians collectively provide much smaller amounts of uncompensated or

undercompensated care, so all else held equal, the overall impact of expanded insurance

coverage on their payments rates would also be smaller.)

The net effect of those opposing pressures would thus depend on their relative magnitude

and also on the degree to which cost shifting occurred in each case. Given the size of the

annual decline in undercompensated care that seems likely to ensue, the adverse effects

on hospital finances stemming from greater enrollment in Medicaid, cuts in Medicare

payment rates, and enrollment in the public plan would also have to be substantial to

offset those savings for hospitals as a group. (The net effect would differ from hospital to

hospital.) As for the extent of cost shifting, CBO’s assessment of the evidence is that

some does occur but that it is not as widespread or extensive as is commonly assumed.

Well-designed studies have found that a relatively small share of the changes in payment

rates for the government’s programs is passed on to private payment rates, and the impact

of changes in uncompensated care is likely to be similar.8 Overall, therefore, the effect

the proposal would have on private-sector premiums via cost shifting is unclear.

Changes in Payment Methods

In addition to proposed changes in Medicare’s payment rates, the proposal would also

alter some of Medicare’s payment methods—or at least test such changes—which might

ultimately reduce private insurance costs to a limited degree. For example, the proposal

would establish a demonstration project to examine the use of “accountable care

organizations” and would make other modifications that could encourage reductions in

health care spending.9 To the extent that future steps to implement such changes in a

more aggressive way also changed how doctors treated privately insured patients, some

benefits could “spill over” to the private sector. However, such effects would probably

represent a small fraction of privately insured medical costs over the next 10 years,

 

8 For a more extensive discussion of this issue and the evidence about its effects, see Congressional Budget

Office, Key Issues in Analyzing Major Health Insurance Proposals (December 2008), pp. 112–116.

9 For an explanation of how accountable care organizations might reduce Medicare spending, see Option 37

in Congressional Budget Office, Budget Options, Volume 1: Health Care (December 2008), p. 72.
10

paralleling the relatively small effects in Medicare itself as a proportion of total program

spending in that period.

Impact on the Labor Market

This proposal, like others to reform the health insurance system, could affect labor

markets in several ways.10 In general:

• Requiring employers to offer health insurance—or pay a fee if they do not—would be

likely to reduce employment, although the effect would probably be small.

• Providing new subsidies for health insurance that decline in value as a person’s

income rises could discourage some people from working more hours.

• Increasing the availability of health insurance that is not related to employment could

lead more people to retire before age 65 or choose not to work at younger ages. It

might also encourage other workers to take jobs that better match their skills, because

they would not have to stay in less desirable jobs solely to maintain their health

insurance.

Under the proposal, employers with annual payroll above specified levels would be

required to offer health insurance to their workers and contribute a significant share

toward the premium or pay a tax equal to as much as 8 percent of their total payroll. For

the firms that chose not to offer qualified insurance, that penalty would increase the cost

of employing each worker by somewhat less than 8 percent (because total compensation

generally exceeds the taxable payroll to which this fee would apply). The overall impact

on employment would probably be muted, however, because employers would be

expected to pass the costs of such fees on to workers in the form of lower wages than

would otherwise be paid—just as the costs paid by employers for health insurance are

generally passed on to workers. Because the requirement would not be instituted until

2013, employers would be able to plan for its implementation; CBO also projects that the

economy will have largely recovered from the current recession by that date.

Nonetheless, such a change would tend to reduce the hiring of workers at or near the

minimum wage, because their wages might not be able to decline by the full amount of

the fee (or by the costs of the health insurance that would have to be provided to avoid

the fee). Still, the impact of the proposal on low-wage workers would probably be small

because studies suggest that moderate increases in the minimum wage generally have

limited effects on employment. An 8 percent increase in the cost of hiring a worker

 

10 For a more extensive discussion, see Congressional Budget Office, Effects of Changes to the Health

Insurance System on Labor Markets, Issue Brief (July 13, 2009). The overall impact of health reform

proposals on labor markets is difficult to predict. Although economic theory and experience provide some

guidance as to the effect of specific provisions, large-scale changes to the health insurance system could

have more extensive repercussions than have previously been observed and could also involve numerous

factors that would interact—affecting labor markets in significant but potentially offsetting ways.
11

making the minimum wage—which was just increased to $7.25 per hour—would amount

to roughly $0.60 per hour, which is also about the size of the increase in the minimum

wage that just took effect. Moreover, firms with an annual payroll below $250,000 would

be exempt from the play-or-pay requirement.

Another feature of the proposal relevant to labor markets is that the subsidies for

insurance coverage offered via the exchanges would phase out as enrollees’ income rose,

effectively reducing the compensation they would receive for each additional hour

worked. That effect, which is an “implicit tax,” can lead people to work fewer hours than

they otherwise would, in the same way that income and payroll taxes can. Specifically,

the proposal would provide subsidies to help cover the costs of purchasing insurance and

would phase out those subsidies as income increased from 133 percent to 400 percent of

the federal poverty level. Over that range, the share of income that enrollees would have

to pay in premiums for coverage in the exchanges would increase from 1.5 percent to

11 percent, and the extent of coverage that would be subsidized would also decline so

that enrollees with higher income would pay higher out-of-pocket costs as well. With

limited exceptions, the subsidies would not be available to the vast majority of workers

who had a qualified offer of health insurance from their employer; in addition, some

workers who would not have employment-based insurance would have income above

400 percent of the poverty level. As a result, changes in the work hours of people affected

by this implicit tax would have a much smaller proportionate effect on total hours worked

in the U.S. economy.11

To express those effects in round terms using current levels of premiums and income, the

subsidy might decline from roughly $5,000 to zero for single adults over an income range

of about $30,000, and from roughly $13,000 to zero for a family of four over an income

range of about $60,000. Thus, the implicit tax rate over that income range—that is, the

extent to which those subsidies would decline as income rose—would be around

20 percent (but would vary somewhat across income levels because the subsidies would

not phase out in a uniform way).12 A proposal that phased out subsidies more quickly

would yield even higher implicit tax rates; for example, the implicit tax rate would range

from about 28 percent to about 35 percent if the same subsidies were phased out

uniformly between 133 percent and 300 percent of the federal poverty level. Conversely,

those implicit tax rates could be reduced by extending the subsidies further up the income

scale, but doing so would expand the number of people affected by this implicit tax and

would also increase the budgetary cost of the proposal. In any event, the implicit tax rates

created by the phase-out of subsidies would come on top of existing income and payroll

tax rates.

 

11 The proposal would also raise tax rates on higher-income taxpayers through a surcharge. This report does

not address the effects of that surcharge.

12 Over time, as the costs of health care rose more rapidly than income, the implicit tax rate would increase.
12

Through the insurance exchanges and expanded eligibility for Medicaid, the proposal

would enhance access to health insurance for people who are not employed and would

provide subsidies for insurance to people with income below 400 percent of the federal

poverty level who do not have employment-based coverage. Those provisions could

encourage more people to retire before age 65, and they might lead some people to

choose not to work at younger ages. The provisions might also lead to better matches

between workers and jobs, because workers would not have to stay in less desirable jobs

solely to maintain their health insurance.

Longer-Term Costs of the Proposal

Estimating the effects of major changes to the health care and health insurance systems

over the next 10 years is very difficult and involves substantial uncertainty; generating

longer-term estimates is even more challenging and is fraught with even greater

uncertainty. As a result, CBO does not provide formal cost estimates beyond the 10-year

budget window. However, we have said that in evaluating proposals to reform health

care, the agency will endeavor to offer a qualitative indication of whether they would be

more likely to increase or decrease the budget deficit over the second decade.13

The starting point for such an analysis of the recent House proposal is our estimate of the

proposal’s impact on the federal budget deficit in the first 10 years. As discussed in

CBO’s letter of July 17, we estimate that the proposal as a whole would increase federal

deficits by $239 billion over the 2010–2019 period. That estimate has three major

components: the net effect of the coverage specifications, which affect both spending and

revenues and which would add an estimated $1,042 billion to cumulative deficits over

that period; the effect of other provisions, primarily regarding Medicare, that would

reduce direct spending by a net $219 billion; and the effect of still other provisions

(primarily, an income tax surcharge on high-income individuals) that would increase

revenues by $583 billion. Under the proposal, federal spending on health care would

increase by approximately the difference between the net cost of the coverage

specifications and the reductions in direct spending.

Looking ahead to the decade beyond 2019, CBO tries to evaluate the rate at which the

budgetary impact of each of those broad categories would be likely to change over time.

The net cost of the coverage provisions would be growing at a rate of more than 8 percent

per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in

the subsequent decade. The reductions in direct spending would also be larger in the

second decade than in the first, and they would represent an increasing share of spending

on Medicare over that period; however, they would be much smaller at the end of the

10-year budget window than the cost of the coverage provisions, so they would not be

likely to keep pace in dollar terms with the rising cost of the coverage expansion.

Revenue from the surcharge on high-income individuals would be growing at about

5 percent per year in nominal terms between 2017 and 2019; that component would

 

13 For discussion of our approach to developing such qualitative information, see the CBO Director’s Blog,

“The Effects of Health Reform Legislation beyond the Next Decade” (July 24, 2009).
13

continue to grow at a slower rate than the cost of the coverage expansion in the following

decade. In sum, relative to current law, the proposal would probably generate substantial

increases in federal budget deficits during the decade beyond the current 10-year budget

window.

Under any proposal that provided new federal subsidies for the purchase of health

insurance, the rate of growth in federal spending would depend importantly on how the

subsidies were indexed over time. As long as overall spending for health care continued

to expand as a share of the economy, people’s share of insurance costs would continue to

rise faster than their income, or the government’s subsidy costs would continue to rise

faster than the tax base, or both. The proposal limits the share of income that eligible

people would have to pay when they purchased coverage in the insurance exchanges, and

that share of income would not change over time. In addition, insurance plans offered

through the exchanges would be required to pay a specified share of costs for covered

services (on average), and that share also would not change over time. Combining those

provisions, increases in health care spending in excess of the rate of growth in income

would be borne entirely by the federal government in the form of higher subsidy

payments—because those payments would have to cover the entire difference between

the total premium for insurance coverage and the capped amount that enrollees would

pay. Those factors help explain why the costs of the coverage provisions would continue

to grow rapidly in the decade after 2019.

Allocation of the Net Budgetary Impact Between

Outlays and Revenues

On July 14, CBO and the JCT staff provided preliminary estimates of the effects of the

proposal’s specifications regarding insurance coverage on the federal budget; the relevant

table from that letter is attached for reference. Those estimates included the major cash

flows that would affect the budget and the net effects on the budget deficit during the

2010–2019 period, but they did not allocate the net budgetary impact into changes in

outlays and changes in revenues. Moreover, the preliminary estimates did not include all

of the cash flows that would appear in a formal and complete cost estimate.

The amounts shown in the table for new federal spending on Medicaid and the Children’s

Health Insurance Program would be outlays, as would the spending for subsidies to

purchase insurance coverage through the new exchanges. Those two streams of outlays

would amount to an estimated $1,211 billion over 10 years.

All of the other flows of funds shown in the table would represent changes in revenues,

netting to a projected increase in federal revenues of $169 billion over 10 years. Increases

in revenues would include the payments by employers to the exchanges for workers who

received coverage there (amounting to $45 billion); payments of penalties by uninsured

individuals ($29 billion); and payments of play-or-pay penalties by employers

($163 billion). Together, those provisions would increase federal revenues by a total of

$238 billion over 10 years. Other flows would represent decreases in revenues. Under the
14

proposal, firms with relatively few employees and relatively low average wages would

also be eligible for tax credits to cover up to half of their contributions toward health

insurance premiums, which would reduce revenues by an estimated $53 billion over

10 years. The proposal would also have other effects on tax revenues, largely stemming

from changes in the mix of compensation provided to workers between taxable wages

and salaries and nontaxable health insurance benefits; on net, those changes would reduce

federal revenues by $15 billion over 10 years.

In addition to the cash flows that are shown in the table, some additional transactions

would appear in the budget but would net to zero and thus would not affect the deficit.

Those transactions, which CBO and the JCT staff have not yet estimated, would appear

either as outlays and offsetting receipts or collections (that is, offsets to outlays), or as

outlays and revenues. One set of additional cash flows would be the outlays for the public

plan and its premiums, which would be offsetting receipts or collections. Another set of

cash flows would be the risk-adjustment transfers among plans operating in the insurance

exchanges—going from those with relatively healthy enrollees (which would be

revenues) to those with relatively unhealthy enrollees (which would be outlays of an

equal and offsetting magnitude).

Finally, as CBO noted in its letter of July 14, the preliminary analysis of the proposal did

not include federal administrative costs or account for all effects on other federal

programs. Including those factors and refining the preliminary analysis in other ways

could affect our estimates of the changes in outlays and revenues generated by the

proposal and thus its impact on federal deficits.
Preliminary Analysis of the Insurance Coverage Specifications Provided by the House Tri-Committee Group

EFFECTS ON INSURANCE COVERAGE /a 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

(Millions of nonelderly people, by calendar year)

 Current Law Medicaid/CHIP 40 39 39 38 35 34 35 35 35 35

 Coverage /b Employer 150 153 156 158 161 162 162 162 162 162

Nongroup 13 12 12 12 13 14 14 14 14 15

Other /c 14 14 14 14 14 15 15 15 15 16

Uninsured /d 50 51 51 51 51 51 52 53 53 54

TOTAL 267 269 271 273 274 276 277 279 281 282

 Change (+/-) Medicaid/CHIP * -1 -2 6 4 9 10 10 11 11

Employer * * 1 10 7 4 3 3 2 2

Nongroup/Other /c * * * -3 -4 -6 -6 -6 -6 -6

Exchanges 0 0 0 11 20 27 28 29 29 30

Uninsured /d * 1 1 -23 -28 -35 -35 -36 -37 -37

Post-Policy Insurance Coverage

 Number of Uninsured People /d 51 52 52 27 23 16 16 17 17 17

 Insured Share of the Nonelderly Population

 Including All Residents 81% 81% 81% 90% 92% 94% 94% 94% 94% 94%

 Excluding Unauthorized Immigrants 83% 83% 83% 92% 94% 97% 97% 97% 97% 97%

Memo: Exchange Enrollees and Subsidies

 Number w/ Unaffordable Offer from Employer /e * 2 2 2 3 3 3

 Number of Unsubsidized Exchange Enrollees 1 2 3 3 3 3 3

 Approximate Average Subsidy per Subsidized Enrollee $4,600 $4,800 $5,100 $5,300 $5,700 $6,000

Sources: Congressional Budget Office and the staff of the Joint Committee on Taxation. 

Note: CHIP = Children's Health Insurance Program; * = fewer than 0.5 million people. 

a. Components may not sum to totals because of rounding. 

b. Figures reflect average annual enrollment. Individuals reporting mutiple sources of coverage are assigned a primary source. 

c. Includes Medicare, TRICARE, and other sources; the effects of the proposal are almost entirely on nongroup coverage. 

d. The count of uninsured people includes unauthorized immigrants as well as people who are eligible for, but not enrolled in, Medicaid. 7/14/2009

e. Full-time workers who would have to pay more than 11 percent of their income for employment-based coverage could receive subsidies via an exchange (see text). Page 1 of 2
Preliminary Analysis of the Insurance Coverage Specifications Provided by the House Tri-Committee Group

EFFECTS ON THE FEDERAL DEFICIT / a,b,c 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010-2019

(Billions of dollars, by fiscal year)

 Medicaid/CHIP Outlays /d,e 3 4 1 29 42 58 66 72 78 84 438

 Exchange Subsidies 0 0 0 33 72 105 123 134 146 160 773

 Payments by Employers to Exchanges /f,g 0 0 0 0 -3 -6 -8 -8 -9 -11 -45

 Associated Effects on Tax Revenues /f * * * 10 10 3 -1 -1 -2 -4 15

Subtotal 3 4 1 72 122 160 180 196 213 230 1,182

 Small Employer Credits /h 0 0 0 4 7 8 8 8 10 10 53

 Payments by Uninsured Individuals 0 0 0 0 -6 -5 -4 -5 -5 -5 -29

 "Play-or-Pay" Payments by Employers /f,h 0 0 0 -7 -16 -21 -26 -29 -31 -33 -163

 NET IMPACT OF COVERAGE SPECIFICATIONS 3 4 1 69 107 141 158 171 187 202 1,042

Sources: Congressional Budget Office and the staff of the Joint Committee on Taxation. 

Note: CHIP = Children's Health Insurance Program; * = between $0.5 billion and -$0.5 billion. 

a. Does not include federal administrative costs or account for all effects on other federal programs. 

b. Components may not sum to totals because of rounding. 

c. Positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit. 

f. Increases in tax revenues reduce the deficit.

g. Employers would generally have to pay 8 percent of their average payroll per worker for each employee who received subsidies via an exchange (see text). 7/14/2009

h. The effects on the deficit shown for this provision include the associated effects of changes in taxable compensation on tax revenues. Page 2 of 2

d. Includes effects of coverage provisions and the proposed increase in Medicaid payment rates for primary care physicians (see text).

e. Under current law, states have the flexibility to make programmatic and other budgetary changes to Medicaid and CHIP. CBO estimates that state spending on Medicaid and CHIP 

in the 2010-2019 period would be reduced by about $10 billion under the proposal (see text). 
www.cbo.gov 

CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director 

U.S. Congress 

Washington, DC 20515 

September 10, 2009 

Honorable Michael B. Enzi 

Ranking Member 

Committee on Health, Education, 

 Labor, and Pensions 

United States Senate 

Washington, DC 20510 

Dear Senator: 

This letter responds to several questions that you raised following my 

appearance before the Committee on Health, Education, Labor, and 

Pensions (HELP) during its consideration of the Affordable Health Choices 

Act. The Congressional Budget Office (CBO) and the staff of the Joint 

Committee on Taxation (JCT) issued a preliminary and partial analysis of 

that legislation as it was introduced on July 1, 2009.1

 We have not 

completed an assessment of the legislation as it was ultimately approved by 

the committee, including the amendments that were adopted during markup 

of the bill. 

Effects of Expanding the Medicaid Program 

You asked what the total cost would be of combining the committee’s 

legislation with an expansion of eligibility for Medicaid for all legal U.S. 

residents with income below 150 percent of the federal poverty level (FPL). 

As you know, the Affordable Health Choices Act, as introduced, would not 

expand eligibility for Medicaid, but an earlier draft included language 

indicating that such an expansion would be added by the Senate Finance 

Committee (which has jurisdiction over Medicaid). Because our analysis of 

the introduced legislation examined only the changes in law that would 

result from it, we could not presume an expansion of eligibility for 

Medicaid or other new subsidies for health insurance beyond those that 

were specified. Overall, our preliminary assessment was that the provisions 

of the legislation pertaining to insurance coverage (contained in title I of the 

 

1

 Congressional Budget Office, letter to the Honorable Edward M. Kennedy providing CBO’s 

preliminary analysis of title I of the Affordable Health Choices Act (July 2, 2009). 
Honorable Michael B. Enzi 

Page 2 

bill) would increase federal deficits by $645 billion over the 2010–2019 

period. 

As CBO indicated in its letter to Senator Gregg on July 6, 2009, expanding 

eligibility for Medicaid to legal residents with income up to 150 percent of 

the FPL would increase the federal cost of the legislation considerably—by 

an amount that is probably on the order of $500 billion over 10 years.2

(CBO did not estimate the costs to state governments of such a Medicaid 

expansion, but those costs would probably be relatively small because the 

options that CBO examined to expand Medicaid would have required states 

to cover a much smaller share of total spending than is seen in the current 

Medicaid program.) Therefore, the 10-year cost of the coverage expansion 

to the federal government, including such a change in Medicaid eligibility, 

would probably exceed $1 trillion. Combining such an expansion with the 

Affordable Health Choices Act as introduced would also yield a 

substantially larger reduction in the number of people who are uninsured 

than would arise from the act alone, because about half of the people 

projected to be uninsured under current law would have income below 

150 percent of the FPL. 

Because the magnitude of the effects on both federal costs and rates of 

insurance coverage for the combination of the committee’s legislation and a 

Medicaid expansion would depend importantly on the details of the 

proposal, we cannot give you a more precise estimate at this time. For 

example, the effects would depend on how eligibility for Medicaid was 

determined and on whether the expansion started in 2010 or at a later date. 

The effects would also depend on what share of the costs for newly eligible 

people was borne by the federal government and what share was borne by 

the states. Furthermore, the effects would depend on whether states faced a 

maintenance-of-effort requirement relative to their current Medicaid 

programs. Regardless of its specific features, adding a Medicaid expansion 

to the introduced bill would not only affect federal costs for Medicaid but 

also have implications for other components of our preliminary estimate—

because employers and individuals would probably respond to the bill’s 

other provisions differently in that case. 

An illustration of the effects of including a substantial expansion of 

Medicaid can be seen in the preliminary analysis that CBO and JCT have 

provided of the coverage specifications reflected in H.R. 3200, the 

 

2

 Congressional Budget Office, letter to the Honorable Judd Gregg regarding the likely effects of 

substantially expanding eligibility for Medicaid (July 8, 2009). 
Honorable Michael B. Enzi 

Page 3 

America’s Affordable Health Choices Act of 2009, as introduced in the 

House of Representatives on July 14, 2009.3

 That proposal would expand 

eligibility for Medicaid to all nonelderly individuals with income below 

133 percent of the FPL (with all of the costs for newly eligible enrollees 

borne by the federal government) and would provide subsidies via 

insurance exchanges on a sliding scale for those with income up to 

400 percent of the FPL. CBO estimated that federal outlays for Medicaid 

would increase by $438 billion over the 2010–2019 period because of that 

expansion of eligibility for the program and related measures. That figure 

includes the estimated costs of a proposed increase in Medicaid’s payment 

rates for primary care physicians, but does not include the costs of 

providing subsidies for insurance to people with income between 133 

percent and 150 percent of the FPL (which have not been separately 

estimated). 

Effects on Employers and Employees

You also asked whether the costs borne by employers as a result of the 

proposal would be passed on to workers in the form of lower wages than 

they would otherwise be paid, and about the effects of the proposal on 

employment-based health insurance. Under the legislation as introduced, 

firms with more than 25 workers would have to offer health insurance (and 

contribute a specified share of the premiums) or pay a penalty. In general, 

CBO believes that firms that are subject to the penalty but opt not to offer 

health insurance would pass that cost on to their workers, primarily in the 

form of lower wages—just as firms that offer insurance today and 

contribute toward the premiums pay lower wages than they otherwise 

would, keeping their total compensation costs about the same. One 

exception would be workers earning close to the minimum wage, because 

their wages might not be able to adjust downward to offset the cost of the 

penalty; as a result, employment of those workers might be adversely 

affected, though that impact is likely to be small.4

As for the effects of the legislation on employment-based health insurance, 

CBO and JCT estimated that the version that was introduced on July 1 

would not have a major effect on the aggregate number of people obtaining 

coverage through an employer; we estimated that in 2016, for example, the 

total number of people covered by an employment-based plan would be 

 

3

 Congressional Budget Office, letter to the Honorable Charles B. Rangel providing a preliminary 

analysis of the America’s Affordable Health Choices Act of 2009 (July 17, 2009). 

4

 For additional discussion, see Congressional Budget Office, Effects of Changes to the Health 

Insurance System on Labor Markets, Issue Brief (July 13, 2009). 
Honorable Michael B. Enzi 

Page 4 

about 163 million, or about 1 million more than is projected under current 

law. 

That net figure reflects changes going in both directions. Some people 

would gain employment-based coverage, because the mandate to obtain 

health insurance would induce some employers to make an offer of such 

coverage that would not have been made otherwise or would induce some 

individuals to take advantage of an existing offer that they would not have 

accepted otherwise. At the same time, we estimated that about 6 million 

people who would have employment-based coverage under current law 

would not have such coverage under the proposal. That figure includes 

about 2 million workers (and their dependents) who would have an offer 

from their employer that would be deemed “unaffordable” under the 

proposal, thus allowing them to purchase subsidized coverage through the 

new insurance exchanges. It also includes about 4 million people who 

would have coverage through an employer under current law but would not 

have such an offer under the proposal. To what extent those changes in 

coverage would represent the dropping of existing coverage or expected 

offers of coverage that would fail to materialize is difficult to determine. 

Effects of a “Public Plan” 

You also asked whether the federally administered “public plan” that would 

be offered under the legislation as introduced would have a substantial 

effect on federal spending for health care. Under that proposal, the public 

plan would be managed by the Department of Health and Human Services, 

would pay negotiated rates to providers of health care, and would have to 

be financially self-sufficient (albeit with the government bearing some risk, 

as discussed below). Given those provisions, CBO’s assessment is that 

premiums for the public plan would typically be roughly comparable to the 

average premiums of private plans offered in the insurance exchanges—and 

thus the existence of such a plan would not directly affect the amount of 

federal subsidies for health insurance under the legislation. 

Nevertheless, including a public plan would probably have two small 

effects on the premiums of the private plans against which it is competing, 

both of which would tend to lower federal subsidy payments through the 

exchanges to some degree—but we have not quantified that effect by 

comparing the legislation as introduced to a proposal that was identical in 

all other respects but did not include a public plan. 

• First, a public plan as structured in the introduced bill would 

probably attract a substantial minority of enrollees (in part because it 
Honorable Michael B. Enzi 

Page 5 

would include a relatively broad network of providers and would be 

likely to engage in only limited management of its health care 

benefits). As a result, it would add some competitive pressure in 

many insurance markets that are currently served by a limited 

number of private insurers. That competitive pressure would 

probably lower private premiums in the insurance exchanges to a 

small degree. 

• Second, a public plan is also apt to attract enrollees who, overall, are 

less healthy than average (again, because it would include a 

relatively broad network of providers and would probably engage in 

limited management of benefits). Although the payments that all 

plans in the exchanges receive would be adjusted to account for 

differences in the health of their enrollees, the methods used to make 

such adjustments are imperfect. As a result, the higher costs of those 

less healthy enrollees in the public plan would probably be offset 

partially but not entirely; the rest of the added costs would have to be 

reflected in the public plan’s premiums. Correspondingly, the costs 

and premiums of competing private plans would, on average, be 

slightly lower than if no public plan was available. 

At the same time, including a public plan in the proposal would increase the 

gross amount of federal spending on health care simply because all of the 

payments to and from that plan should be recorded in the federal budget, in 

CBO’s judgment.5

 For the public plan, all payments to providers, 

administrative costs, and government subsidy payments would be federal 

expenses, and all subsidy payments and enrollees’ premiums would be 

counted as offsetting receipts (a credit against direct spending). For private 

health insurance plans participating in the new insurance exchanges, by 

contrast, the portion of premiums that is subsidized would be recorded as 

federal outlays; the remainder of private plans’ receipts and costs would not 

appear in the federal budget. Under the assumption that the public plan 

would charge premiums that covered its costs—as it is supposed to do—net

federal outlays on health care would not be appreciably different as a result 

of applying those accounting rules. However, the federal government 

would be assuming the financial risk that the premiums charged in any 

given year might not fully cover all of the public plan’s costs. 

 

5

 Congressional Budget Office, The Budgetary Treatment of Proposals to Change the Nation's 

Health Insurance System, Issue Brief (May 27, 2009). 
Honorable Michael B. Enzi 

Page 6 

Effects on Overall Expenditures for Health Care

You also asked what effect the introduced legislation would have on 

national spending on health care. By itself, a substantial expansion of 

insurance coverage could cause an increase of between 2 percent and 5 

percent in national spending on health care, largely because insured people 

generally receive somewhat more medical care than do uninsured people—

notwithstanding the fact that some newly insured people would avoid 

expensive treatments by getting care sooner, before their illness 

progressed.6

 However, the rise in national spending on health care would be 

less than the increase for the federal government because some costs that 

are now paid by others would be shifted to the government (via the 

subsidies provided by the bill). Expanding insurance coverage would make 

it modestly easier to achieve certain types of reductions in national and 

federal spending on health care; for example, some governmental payments 

to hospitals that treat a disproportionate share of poor and uninsured 

patients might be trimmed accordingly. 

More broadly, legislation could seek to offset the impact of an insurance 

expansion—on both federal costs and total spending for health care—by 

including other provisions affecting either the major federal programs that 

finance health care or the private insurance system. The bill as introduced 

would encourage private insurers to adopt measures to improve the 

coordination of the care they provide, but private insurers would be inclined 

to adopt cost-reducing strategies even in the absence of new legislation, so 

the effect of those provisions on costs is not clear. The insurance market 

reforms included in the bill would reduce administrative costs for 

individually purchased policies, but the resulting savings would probably 

be small relative to the increase in spending brought about by the insurance 

expansion. Given its overall scope, the bill would probably increase 

national spending on health care modestly. 

 

6

 For additional discussion, see Congressional Budget Office, Key Issues in Analyzing Major 

Health Insurance Proposals (December 2008), pp. 71–76. 
Honorable Michael B. Enzi 

Page 7 

I hope this information is helpful to you. If you have any questions, please 

contact me or CBO’s primary staff contacts for this analysis, Philip Ellis 

and Holly Harvey. 

 Sincerely, 

 Douglas W. Elmendorf 

 Director 

cc: Honorable Tom Harkin 

 Chairman 

Honorable Christopher J. Dodd 
www.cbo.gov

CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director 

U.S. Congress 

Washington, DC 20515 

October 29, 2009 

Honorable Charles B. Rangel 

Chairman 

Committee on Ways and Means 

U.S. House of Representatives 

Washington, DC 20515 

Dear Mr. Chairman:

The Congressional Budget Office (CBO) and the staff of the Joint 

Committee on Taxation (JCT) have completed a preliminary analysis of 

H.R. 3962, the Affordable Health Care for America Act, as introduced on 

October 29, 2009. For several reasons described later, this analysis does not 

constitute a final and comprehensive cost estimate for the bill. 

Among other things, H.R. 3962 would establish a mandate for most legal 

residents of the United States to obtain health insurance; set up insurance 

“exchanges” through which certain individuals and families could receive 

federal subsidies to substantially reduce the cost of purchasing that 

coverage; significantly expand eligibility for Medicaid; substantially reduce 

the growth of Medicare’s payment rates for most services (relative to the 

growth rates projected under current law); impose an income tax surcharge 

on high-income individuals; and make various other changes to the federal 

tax code, Medicaid, Medicare, and other programs. 

CBO and JCT’s preliminary assessment of the bill’s impact on the federal 

budget deficit is summarized in Table 1 below. Tables 2 and 3 provide 

estimates of the changes in the number of nonelderly people in the United 

States who would have health insurance, present the primary budgetary 

effects of H.R. 3962’s provisions directly related to insurance coverage, 

and display detailed estimates of the cost or savings from other proposed 

changes (primarily to the Medicare program) that would affect the federal 

government’s direct spending and some aspects of federal revenue. The 

analysis also examines the longer-term effects of the proposal on the federal 

budget and reviews the main reasons why this analysis differs from the 
Honorable Charles B. Rangel 

Page 2 

preliminary analysis CBO released in July for H.R. 3200, the America’s 

Affordable Health Choices Act of 2009, as introduced on July 14, 2009. 

Estimated Budgetary Impact of H.R. 3962 

According to CBO and JCT’s assessment, enacting H.R. 3962 would result 

in a net reduction in federal budget deficits of $104 billion over the 2010–

2019 period (see Table 1). In the subsequent decade, the collective effect of 

its provisions would probably be slight reductions in federal budget 

deficits. Those estimates are all subject to substantial uncertainty. 

The estimate includes a projected net cost of $894 billion over 10 years for 

the proposed expansions in insurance coverage. That net cost itself reflects 

a gross total of $1,055 billion in subsidies provided through the exchanges 

(and related spending), increased net outlays for Medicaid and the 

Children’s Health Insurance Program (CHIP), and tax credits for small 

employers; those costs are partly offset by $167 billion in collections of 

penalties paid by individuals and employers. On balance, other effects on 

revenues and outlays associated with the coverage provisions add $6 billion 

to their total cost. 

Over the 2010–2019 period, the net cost of the coverage expansions would 

be more than offset by the combination of other spending changes, which 

CBO estimates would save $426 billion, and receipts resulting from the 

income tax surcharge on high-income individuals and other provisions, 

which JCT and CBO estimate would increase federal revenues by 

$572 billion over that period.1

 

Provisions Regarding Insurance Coverage 

H.R. 3962 would take several steps designed to increase the number of 

legal U.S. residents who have health insurance. It would require individuals 

to purchase health insurance, starting in 2013, and would in many cases 

impose a financial penalty on people who did not do so. The bill also would 

establish new insurance exchanges and would generally subsidize the 

purchase of health insurance through those exchanges for qualified 

individuals and families with income between 150 percent and 400 percent 

of the federal poverty level (FPL). 

 

1

 The $572 billion figure includes $558 billion in revenues from tax provisions (estimated by JCT) 

and $14 billion in additional revenues from certain provisions affecting Medicare, Medicaid, and 

other programs (estimated by JCT and CBO). (For JCT’s estimates, see JCX-43-09.) 
Honorable Charles B. Rangel 

Page 3 

TABLE 1. PRELIMINARY ESTIMATE OF THE EFFECTS ON THE DEFICIT OF 

H.R. 3962, THE AFFORDABLE HEALTH CARE FOR AMERICA ACT, 

AS INTRODUCED ON OCTOBER 29, 2009 

 By Fiscal Year, in Billions of Dollars 

 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

 

NET CHANGES IN THE DEFICIT FROM INSURANCE COVERAGE PROVISIONS a

 

Effects on the Deficit * 1 2 57 93 123 137 148 160 173 153 894

 

NET CHANGES IN THE DEFICIT FROM OTHER PROVISIONS AFFECTING DIRECT SPENDING b

 

Effects on the Deficit of 

Changes in Outlays 7 17 -16 -25 -52 -51 -54 -72 -85 -96 -69 -426

 

NET CHANGES IN THE DEFICIT FROM OTHER PROVISIONS AFFECTING REVENUES c

 

Effects on the Deficit of 

Changes in Revenues d

 * -33 -35 -57 -62 -67 -72 -77 -82 -86 -188 -572

NET CHANGES IN THE DEFICIT a

Net Increase or Decrease (-) 

in the Budget Deficit 6 -15 -49 -25 -21 5 11 -1 -7 -9 -104 -104

 On-Budget 6 -15 -49 -27 -23 4 10 -3 -8 -10 -108 -115

 Off-Budget e

 * * * 2 2 2 2 1 1 1 4 11

Sources: Congressional Budget Office and staff of the Joint Committee on Taxation (JCT). 

Notes: Positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit. 

 

 Components may not sum to totals because of rounding; * = between $0.5 billion and -$0.5 billion. 

 

a. Does not include effects on spending subject to future appropriations. 

b. These estimates reflect the effects of interactions between insurance coverage provisions and other Medicare and Medicaid 

provisions. In addition, CBO has included $33 billion of spending over the 2010–2019 period for public health, prevention, 

and wellness provisions in these direct spending totals, as directed by the Committee on the Budget, even though that 

spending would be subject to future appropriation action. 

c. The changes in revenues include effects on Social Security revenues, which are classified as off-budget. 

d. The 10-year figure of $572 billion includes $558 billion in revenues from tax provisions (estimated by JCT) and $14 billion 

in additional revenues from certain provisions affecting Medicare, Medicaid, and other programs (estimated by JCT and 

CBO). (For JCT’s estimates see JCX-43-09.) 

e. Off-budget effects include changes in Social Security spending and revenues. 
Honorable Charles B. Rangel 

Page 4 

Policies purchased through the exchanges (or directly from insurers) would 

have to meet several requirements: In particular, insurers would have to 

accept all applicants, could not limit coverage for preexisting medical 

conditions, and could not vary premiums to reflect differences in enrollees’ 

health.2

 The options available in the insurance exchange would include 

private health insurance plans as well as a public plan that would be 

administered by the Secretary of Health and Human Services (HHS). The 

public plan would negotiate payment rates with all providers and suppliers 

of health care goods and services; providers would not be required to 

participate in the public plan in order to participate in Medicare. The public 

plan would have to charge premiums that covered its costs, including the 

costs of paying back start-up funding that the government would provide. 

Starting in 2013, nonelderly people with income below 150 percent of the 

FPL would generally be made eligible for Medicaid; the federal 

government would pay a share of the costs of covering newly eligible 

enrollees that averaged about 91 percent. (Under current rules, the federal 

government usually pays about 57 percent, on average, of the costs of 

Medicaid benefits.) In addition, states would be required to maintain 

current coverage levels for individuals under Medicaid and some children 

in CHIP through 2019. Beginning in 2014, states would shift some children 

in CHIP to Medicaid, but the federal government would continue to provide 

enhanced reimbursement, which currently averages about 70 percent, to 

states for providing such benefits. CBO estimates that state spending on 

Medicaid would increase on net by about $34 billion over the 2010–2019 

period as a result of the provisions affecting insurance coverage reflected in 

Table 2. That estimate reflects states’ flexibility to make programmatic and 

other budgetary changes to Medicaid and CHIP. 

H.R. 3962 contains a number of other key provisions related to insurance 

coverage. It would impose a “play-or-pay” requirement on employers, who 

would either have to offer qualifying insurance to their employees and 

contribute a substantial share toward the premiums, or pay a fee to the 

federal government that would generally equal 8 percent of their payroll. 

Smaller employers (those with an annual payroll of less than $750,000) 

would either pay a lower rate or be exempt from that requirement 

 

2 The analysis also takes into account the provisions of section 262 of Division A regarding the 

application of federal antitrust laws to health insurers. CBO estimates that implementing those 

provisions would have no significant effects on either the federal budget or the premiums that 

private insurers charged for health insurance. For an analysis of a similar proposal, see CBO’s cost 

estimate for H.R. 3596, the Health Insurance Industry Antitrust Enforcement Act of 2009 

(October 23, 2009). 
Honorable Charles B. Rangel 

Page 5 

altogether. As a rule, full-time employees with a qualifying offer of 

coverage from their employers would not be eligible to obtain subsidies via 

the exchanges, but an exception to that “firewall” would be allowed for 

workers who had to pay more than 12 percent of their income for their 

employers’ insurance. In that case, the employers would have to pay an 

amount equal to the per-worker fee due for firms subject to the play-or-pay 

penalty. Under certain circumstances, firms with relatively few employees 

and relatively low average wages would also be eligible for tax credits to 

cover up to half of their contributions toward health insurance premiums. 

On a preliminary basis, CBO and JCT estimate that H.R. 3962’s provisions 

affecting health insurance coverage would result in a net increase in federal 

deficits of $894 billion over fiscal years 2010 through 2019. That estimate 

primarily reflects $425 billion in net federal outlays for Medicaid and CHIP 

and $605 billion in federal subsidies that would be provided to purchase 

coverage through the new insurance exchanges and related spending.3

 The 

other main element of the coverage provisions that would increase federal 

deficits is the tax credit for certain small employers who offer health 

insurance, which is estimated to reduce revenues by $25 billion over 

10 years. Those costs would be partly offset by a net increase in receipts, 

totaling $167 billion over the period, from two sources: penalty payments 

by uninsured individuals, which would yield receipts of about $33 billion, 

and penalty payments by employers under the play-or-pay requirement, 

which would total about $135 billion. Other effects on tax revenues and 

outlays for Social Security that are associated with the coverage provisions 

would increase deficits by $6 billion.4

By 2019, CBO and JCT estimate, the number of nonelderly people who are 

uninsured would be reduced by about 36 million, leaving about 18 million 

nonelderly residents uninsured (about one-third of whom would be 

unauthorized immigrants). Under H.R. 3962, the share of legal nonelderly 

residents with insurance coverage would rise from about 83 percent 

currently to about 96 percent. Roughly 21 million people would purchase 

their own coverage through the new insurance exchanges, and there would 

 

3

 Related spending includes the administrative costs of establishing and operating the exchanges, 

as well as $5 billion in spending for high-risk insurance pools. 

4

 Changes in the extent of employment-based health insurance affect federal revenues because 

most payments for that coverage are tax-preferred. If employers increase or decrease the amount 

of compensation they provide in the form of health insurance (relative to current-law projections), 

CBO and JCT assume that offsetting changes will occur in wages and other forms of 

compensation—which are generally taxable—to hold total compensation roughly the same. Such 

effects also arise with respect to specific elements of the proposal (such as the tax credits for small 

employers), and those effects are included within the estimate for those elements. 
Honorable Charles B. Rangel 

Page 6 

be roughly 15 million more enrollees in Medicaid than the total number 

projected for Medicaid and CHIP combined under current law. (Under the 

bill, CHIP would no longer exist in 2019.) Relative to currently projected 

levels, the number of people purchasing individual coverage outside of the 

exchanges would decrease by about 6 million, and the number obtaining 

coverage through employers would increase by about 6 million. 

Under the proposal, certain employers could allow all of their workers to 

choose among the plans available in the exchanges, but those enrollees 

would not be eligible to receive subsidies via the exchanges (and thus are 

shown in Table 2 as enrollees in employment-based coverage rather than as 

exchange enrollees). CBO and JCT expect that approximately 9 million 

people would obtain coverage in that way in 2019, bringing the total 

number of people enrolled in exchange plans to about 30 million in that 

year. Roughly one-fifth of the people purchasing coverage through the 

exchanges would enroll in the public plan, meaning that total enrollment in 

that plan would be about 6 million. 

That estimate of enrollment reflects CBO’s assessment that a public plan 

paying negotiated rates would attract a broad network of providers but 

would typically have premiums that are somewhat higher than the average 

premiums for the private plans in the exchanges. The rates the public plan 

pays to providers would, on average, probably be comparable to the rates 

paid by private insurers participating in the exchanges. The public plan 

would have lower administrative costs than those private plans but would 

probably engage in less management of utilization by its enrollees and 

attract a less healthy pool of enrollees. (The effects of that “adverse 

selection” on the public plan’s premiums would be only partially offset by 

the “risk adjustment” procedures that would apply to all plans operating in 

the exchanges.) 

Provisions Affecting Medicare, Medicaid, and Other Programs

Other components of H.R. 3962 would alter spending for Medicare, 

Medicaid, and other federal health programs. The bill would make 

numerous changes to payment rates and payment rules in those programs 

(the budgetary effects of which are summarized in Table 1 and detailed in 

Table 3). In total, CBO estimates that enacting those provisions would 

reduce direct spending by about $426 billion over the 2010–2019 period.5

 

5

 In addition, the effects of certain Medicare and Medicaid and other provisions would increase 

federal revenues by about $14 billion over the 2010–2019 period. 
Honorable Charles B. Rangel 

Page 7 

Numerous changes to Medicare and Medicaid would reduce direct 

spending over the 2010–2019 period. The provisions that would result in 

the largest budgetary effects include these: 

 Permanent reductions in the annual updates to Medicare’s payment 

rates for most services in the fee-for-service sector (other than 

physicians’ services), yielding budgetary savings of $229 billion 

over 10 years. (That calculation excludes interactions between those 

provisions and others—namely, the effects of those changes on 

payments to Medicare Advantage plans and collections of Part B 

premiums.) 

 Setting payment rates in the Medicare Advantage program on the 

basis of Medicare spending per beneficiary in the fee-for-service 

sector and changing the way that payments to Medicare Advantage 

plans reflect differences in the health status of enrollees, yielding 

savings of an estimated $170 billion (before interactions) over the 

2010–2019 period. 

 Increasing Medicaid’s payment rates to physicians and other health 

care professionals for the provision of primary care services to 

Medicaid beneficiaries, costing roughly $57 billion over 10 years. 

CBO expects that the Centers for Medicare and Medicaid Services (CMS) 

will soon announce payment rates and changes in payment rules for 

physicians’ services and other services that are set on a calendar year basis. 

Those payment rates and rules may differ from the current-law assumptions 

underlying CBO’s baseline projections. If so, CBO will update its estimates 

of Medicare spending under current law to reflect those changes and will 

revise these preliminary estimates of the impact of H.R. 3962 to reflect the 

effects of the new rules on spending under current law and under the bill. 

H.R. 3962 includes a number of other provisions with a significant 

budgetary effect. They include the following: 

 Community Living Assistance Services and Supports (CLASS) 

provisions, which would establish a voluntary federal program for 

long-term care insurance. Active workers could purchase coverage, 

usually through their employer. Premiums would be set to cover the 

full cost of the program as measured on an actuarial basis. However, 

the program’s cash flows would initially show net receipts in early 

years, followed by net outlays in later years. In particular, the 
Honorable Charles B. Rangel 

Page 8 

program would pay out far less in benefits than it would receive in 

premiums over the 10-year budget window, reducing deficits by 

about $72 billion over that period. 

 A Public Health Investment Fund and a Prevention and Wellness

Trust, which would be funded through future appropriations of about 

$34 billion to finance various public health, prevention, and wellness 

programs. (Although outlays from that funding—estimated to total 

$33 billion over the 2010-2019 period—would be subject to future 

appropriation action, the Committee on the Budget has directed 

CBO to count those outlays as direct spending for purposes of 

budget scorekeeping in the House of Representatives.) 

 Requirements that the Secretary of HHS adopt and regularly update 

standards for electronic administrative transactions that enable 

electronic funds transfers, claims management processes, and 

verification of eligibility, among other administrative tasks. These 

provisions would result in about $9 billion in federal savings in 

Medicaid and reduced subsidies paid through the insurance 

exchanges. In addition, these standards would result in an increase in 

revenues of about $13 billion as an indirect effect of reducing the 

cost of private health insurance plans. 

 An abbreviated approval pathway for follow-on biologics (biological 

products that are highly similar to or interchangeable with their 

brand-name counterparts), which would yield direct spending 

savings of an estimated $6 billion over the 2010–2019 period. 

Effect of H.R. 3962 on Discretionary Costs 

CBO has not completed a comprehensive estimate of the discretionary costs 

that would be associated with H.R. 3962. Total costs would include those 

arising from the effects of H.R. 3962 on a variety of federal programs and 

agencies as well as from a number of new and existing programs subject to 

future appropriations. 

The federal agencies that would be responsible for implementing the 

provisions of H.R. 3962 are funded through the appropriation process; 

sufficient appropriations would be essential for them to implement this 

legislation in the time frame it specifies. Major costs for programs subject 

to future appropriations would include these: 
Honorable Charles B. Rangel 

Page 9 

 Costs to the Internal Revenue Service of implementing the eligibility 

determination, documentation, and verification processes for 

subsidies. Those costs would probably be between $5 billion and 

$10 billion over 10 years. 

 Costs to HHS (and especially CMS) of implementing the changes in 

Medicare, Medicaid, and CHIP as well as certain reforms to the 

private insurance market. Those costs would probably be at least 

$5 billion to $10 billion over 10 years. (The administrative costs of 

establishing and operating the exchanges, which are direct spending, 

are included in Table 1.) 

 Costs of a number of grant programs and other changes in Divisions 

C and D of the legislation. CBO has not completed a review of those 

provisions. 

Because those costs depend on future appropriations, they are not counted 

for enforcement of Congressional “pay-as-you-go” procedures, and are not 

included in Table 1. 

As noted in the previous section and in Table 1, funding for the proposed 

Public Health Investment Fund and Prevention and Wellness Trust would 

also be subject to future appropriation action. The bill would authorize 

appropriations totaling about $34 billion for those purposes (of which 

approximately $33 billion would be spent over the next 10 years). The 

Committee on the Budget has directed CBO to count such spending as 

direct spending for purposes of budget scorekeeping in the House of 

Representatives. 

Important Caveats Regarding This Preliminary Analysis

For a number of reasons, the preliminary analysis that is provided in this 

letter does not constitute a final and comprehensive cost estimate for 

H.R. 3962: 

 Although CBO completed a preliminary review of legislative 

language prior to its release, the agency has not thoroughly reviewed 

the introduced legislation to verify its consistency with the previous 

draft. Moreover, the analysis does not reflect all of the provisions of 

the bill. In particular, the analysis does not reflect the impact of 

section 110 of Division A, which would impose certain requirements 

on employers that currently provide health insurance to retirees. 
Honorable Charles B. Rangel 

Page 10 

 The budgetary information shown in the above table reflects many 

of the major cash flows that would affect the federal budget as a 

result of implementing the specified policies and provides a 

preliminary assessment of the net effects on the federal budget 

deficit. However, some cash flows (such as risk adjustment 

payments and collections as well as certain cash flows related to the 

public plan) would appear in the budget but would net to zero and 

thus would not affect the deficit; CBO and JCT have not yet 

estimated all of those cash flows. Furthermore, CBO and JCT have 

not yet divided all of the estimated cash flows into spending and 

revenue components. 

Comparison with CBO and JCT’s Estimate for H.R. 3200

On July 17, 2009, CBO transmitted a preliminary analysis by CBO and JCT 

of H.R. 3200, the America’s Affordable Health Choices Act of 2009, as 

introduced on July 14, 2009. The estimates provided here differ from the 

ones in that analysis for two primary reasons: First, the provisions of 

H.R. 3962 differ from those of H.R. 3200 in a number of significant ways. 

Second, CBO and JCT have made some technical refinements in their 

estimating procedures as well as some changes in the classification of 

certain provisions and their budgetary effects. Prominent examples of such 

changes are as follows: 

 The current proposal expands eligibility for Medicaid to people with 

income up to 150 percent of the FPL, rather than 133 percent; and 

after 2014, it would have the federal government cover about 

91 percent of the cost of newly eligible enrollees, rather than 

100 percent. 

 Previously, CBO had included the costs of increasing payments to 

primary care physicians under Medicaid (totaling roughly 

$60 billion over 10 years) in the table showing the budgetary effects 

of the provisions related to insurance coverage; however, those costs 

are more appropriately reflected in the table showing the budgetary 

effects of provisions affecting Medicare, Medicaid, and other 

programs (see Table 3). 

 The estimated costs of providing subsidies through the new 

insurance exchanges are now lower for several reasons: the larger 

expansion of Medicaid means that fewer people would be eligible 

for coverage through the exchanges; the shares of income that 

enrollees would have to contribute toward their premiums in 2013 
Honorable Charles B. Rangel 

Page 11 

were increased; and those shares were also indexed so that they 

would rise gradually over time (meaning that federal subsidy 

payments would grow somewhat more slowly than those under 

H.R. 3200). 

 More firms were exempted from the play-or-pay requirement, 

reducing the amount of revenue collected from those penalties. In 

addition, CBO and JCT now estimate that the federal administrator 

overseeing the insurance exchanges might well allow medium-sized 

and large firms to purchase coverage through the exchanges. That 

change affects the expected number of people enrolling via the 

exchanges and the number of firms likely to offer coverage to their 

workers; consequently, projected play-or-pay revenues are lower 

than they would have been under the previous assumptions. 

 The current proposal does not include any changes to the sustainable 

growth rate (SGR) mechanism for setting Medicare’s payment rates 

for physicians’ services. A provision of H.R. 3200 that would have 

restructured that mechanism added about $245 billion to CBO’s 

estimate of the net cost of that bill. 

Effects of H.R. 3962 Beyond the First 10 Years 

Although CBO does not generally provide cost estimates beyond the 

10-year budget projection period (2010 through 2019 currently), many 

Members have requested CBO analyses of the long-term budgetary impact 

of broad changes in the nation’s health care and health insurance systems. 

However, a detailed year-by-year projection, like those that CBO prepares 

for the 10-year budget window, would not be meaningful because the 

uncertainties involved are simply too great. Among other factors, 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 (such as 

advances in medical research, technological developments, and changes in 

physicians’ practice patterns)—that are likely to be significant but are very 

difficult to predict, both under current law and under any proposal. 

CBO has therefore developed a rough outlook for the decade following the 

10-year budget window by grouping the elements of the bill into broad 

categories and assessing the rate at which the budgetary impact of each of 

those broad categories is likely to increase over time. Under H.R. 3962, the 

major categories are as follows: 
Honorable Charles B. Rangel 

Page 12 

 The gross cost of the coverage expansions, consisting of exchange 

subsidies, the net costs of expanded eligibility for Medicaid, and tax 

credits for employers: Those provisions have an estimated cost of 

$208 billion in 2019, and that cost is growing at about 8 percent per 

year toward the end of the 10-year budget window. As a rough 

approximation, CBO assumes continued growth at about that rate 

during the following decade. 

 The income tax surcharge on high-income individuals: JCT 

estimates that the provision would generate about $68 billion in 

additional revenues in 2019, and those revenues are growing a little 

faster than 5 percent per year toward the end of the 10-year budget 

window. As a rough approximation, CBO assumes continued growth 

at about that rate during the following decade. 

 Other taxes and the effects of coverage provisions on revenues: The 

increase in revenues from those provisions is estimated to total about 

$52 billion in 2019 and is growing a little faster than 5 percent per 

year toward the end of the budget window. As a rough 

approximation, CBO assumes continued growth at about that rate 

during the following decade. 

 Changes to the Medicare program and changes to Medicaid and 

CHIP other than those associated directly with expanded insurance 

coverage: Savings from those provisions are estimated to total 

$96 billion in 2019, and CBO projects that, in combination, they will 

increase by 10 percent to 15 percent per year in the next decade. 

All told, H.R. 3962 would reduce the federal deficit by $9 billion in 2019, 

CBO and JCT estimate. After that, the added revenues and cost savings are 

projected to grow slightly more rapidly than the cost of the coverage 

expansions. In the decade after 2019, the gross cost of the coverage 

expansions would probably exceed 1 percent of gross domestic product 

(GDP), but the added revenues and cost savings would probably be greater. 

Consequently, CBO expects that the legislation would slightly reduce 

federal budget deficits in that decade relative to those projected under 

current law—with a total effect during that decade that is in a broad range 

between zero and one-quarter percent of GDP. The imprecision of that 

calculation reflects the even greater degree of uncertainty that attends to it, 

compared with CBO’s 10-year budget estimates, and the effects of the bill 

could fall outside of that range. 
Honorable Charles B. Rangel 

Page 13 

As noted earlier, the CLASS program included in the bill would generate 

net receipts for the government in the initial years when total premiums 

would exceed total benefit payments, but it would eventually lead to net 

outlays when benefits exceed premiums. As a result, the program would 

reduce deficits by $72 billion during the 10-year budget window and would 

reduce them by a smaller amount in the ensuing decade (an amount that is 

included in the calculations described in the preceding paragraphs). In the 

decade following 2029, the CLASS program would begin to increase 

budget deficits. However, the magnitude of the increase would be fairly 

small compared with the effects of the bill’s other provisions, so the 

CLASS program does not substantially alter CBO’s assessment of the 

longer-term effects of the legislation. 

Many Members have expressed interest in the effects of reform proposals 

on various measures of spending on health care. CBO uses the term 

“federal budgetary commitment to health care” to describe the sum of net 

federal outlays for health programs and tax preferences for health care—a 

broad measure of the resources committed by the federal government that 

includes both its spending for health care and the subsidies for health care 

that are conveyed through reductions in federal taxes (for example, through 

the exclusion of premiums for employment-based health insurance from 

income and payroll taxes). In H.R. 3962, the gross cost of the coverage 

expansions would represent an increase in this commitment. That increase 

would be offset only in part by the changes to net spending for Medicare, 

Medicaid, CHIP, and other federal programs (other than those associated 

directly with expanded insurance coverage), as well as some small changes 

in the revenues lost through tax expenditures related to health care. On 

balance, during the decade following the 10-year budget window, the bill 

would increase both federal outlays for health care and the federal 

budgetary commitment to health care, relative to the amounts under current 

law. 

Members have also requested information about the effect of proposals on 

national health expenditures. CBO does not analyze those expenditures as 

closely as it does the federal budget, however, and at this point the agency 

has not assessed the net effect of H.R. 3962 on them, either within the 

10-year budget window or for the subsequent decade. 

These longer-term projections assume that the provisions of H.R. 3962 are 

enacted and remain unchanged throughout the next two decades, which is 

often not the case for major legislation. For example, the SGR mechanism 

governing Medicare’s payments to physicians has frequently been modified 
Honorable Charles B. Rangel 

Page 14 

to avoid reductions in those payments, and legislation to do so again is 

currently under consideration in the Congress. The bill would put into 

effect (or leave in effect) a number of procedures that might be difficult to 

maintain over a long period of time. It would leave in place the 21 percent 

reduction in the payment rates for physicians currently scheduled for 2010. 

At the same time, the bill includes a number of provisions that would 

constrain payment rates for other providers of Medicare services. In 

particular, increases in payment rates for many providers would be held 

below the rate of inflation (in expectation of ongoing productivity 

improvements in the delivery of health care). Based on the extrapolation 

described above, CBO expects that Medicare spending under the bill would 

increase at an average annual rate of roughly 6 percent during the next two 

decades—well below the roughly 8 percent annual growth rate of the past 

two decades, despite a growing number of Medicare beneficiaries as the 

baby-boom generation retires.6

 

The long-term budgetary impact of H.R. 3962 could be quite different if 

those provisions generating savings were ultimately changed or not fully 

implemented. If those changes arose from future legislation, CBO would 

estimate their costs when that legislation was being considered by the 

Congress. 

 

 

6

 Based on the same extrapolation, Medicare spending per beneficiary under the bill would 

increase roughly 4 percent per year, on average, during the next two decades—compared with a 

7 percent average growth rate (excluding the effect of establishing Part D) during the past two 

decades. 
Honorable Charles B. Rangel 

Page 15 

I hope this preliminary analysis is helpful for your deliberations. If you 

have any questions, please contact me or CBO staff. The primary staff 

contacts for this analysis are Philip Ellis and Holly Harvey. 

Sincerely, 

Douglas W. Elmendorf 

Director 

Enclosures 

cc: Honorable Dave Camp 

 Ranking Member 

Identical letters sent to the Honorable George Miller, the Honorable Henry 

A. Waxman, and the Honorable John D. Dingell. 
TABLE 2. Preliminary Analysis of the Insurance Coverage Provisions Contained in H.R. 3962

EFFECTS ON INSURANCE COVERAGE /a 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

(Millions of nonelderly people, by calendar year)

 Current Law Medicaid & CHIP 40 39 39 38 35 34 35 35 35 35

 Coverage /b Employer 150 153 156 158 161 162 162 162 162 162

Nongroup & Other /c 27 26 25 26 28 29 29 29 30 30

Uninsured /d 50 51 51 51 51 51 52 53 53 54

TOTAL 267 269 271 273 274 276 277 279 281 282

 Change (+/-) Medicaid & CHIP * -1 -2 8 7 13 14 14 15 15

Employer 1 1 1 12 11 7 7 7 7 6

Nongroup & Other /c * * * -3 -4 -6 -6 -6 -6 -6

Exchanges 0 0 0 9 14 19 20 20 20 21

Uninsured /d * * 1 -25 -28 -34 -34 -35 -35 -36

Post-Policy Insurance Coverage

 Number of Uninsured People /d 50 51 51 26 23 17 18 18 18 18

 Insured Share of the Nonelderly Population /a

 Including All Residents 81% 81% 81% 91% 92% 94% 94% 94% 94% 94%

 Excluding Unauthorized Immigrants 83% 83% 83% 92% 93% 96% 96% 96% 96% 96%

Memo: Exchange Enrollees and Subsidies

 Number w/ Unaffordable Offer from Employer /e * 1 1 1 1 1 1

 Number of Unsubsidized Exchange Enrollees 1 2 3 3 3 3 3

 Approximate Average Subsidy per Subsidized Enrollee $5,500 $5,800 $6,100 $6,500 $6,800

Sources: Congressional Budget Office and the staff of the Joint Committee on Taxation. 

Note: CHIP = Children's Health Insurance Program; * = fewer than 0.5 million people. 

a. Figures for the nonelderly population include only residents of the 50 states and the District of Columbia. 

b. Figures reflect average annual enrollment; individuals reporting multiple sources of coverage are assigned a primary source. 

c. Other includes Medicare; the effects of the proposal are almost entirely on nongroup coverage. 10/29/2009

d. The count of uninsured people includes unauthorized immigrants as well as people who are eligible for, but not enrolled in, Medicaid. Page 1 of 2

e. Workers who would have to pay more than 12 percent of their income for employment-based coverage could receive subsidies via an exchange. 
TABLE 2. Preliminary Analysis of the Insurance Coverage Provisions Contained in H.R. 3962

EFFECTS ON THE FEDERAL DEFICIT / a,b 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010-2019

(Billions of dollars, by fiscal year)

 Medicaid & CHIP Outlays /c -1 -2 -3 27 43 58 66 72 79 85 425

 Exchange Subsidies & Related Spending /d 1 2 4 29 57 82 96 103 111 120 605

 Small Employer Tax Credits /e 0 0 0 4 8 5 2 2 2 2 25

 Gross Cost of Coverage Provisions 0 1 0 59 108 146 165 177 192 208 1,055

 Penalty Payments by Uninsured Individuals 0 0 0 0 -5 -6 -5 -5 -6 -6 -33

 Penalty Payments by Employers /e 0 0 0 -6 -14 -18 -22 -23 -25 -27 -135

 Associated Effects on Tax Revenues & Outlays /f 0 1 1 4 5 1 -1 -1 -1 -2 6

 NET COST OF COVERAGE PROVISIONS 0 1 2 57 93 123 137 148 160 173 894

Sources: Congressional Budget Office and the staff of the Joint Committee on Taxation. 

Note: CHIP = Children's Health Insurance Program. 

a. Does not include federal administrative costs that are subject to appropriation. 

b. Components may not sum to totals because of rounding; positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit. 

e. The effects on the deficit shown for this provision include the associated effects of changes in taxable compensation on tax revenues. 10/29/2009

Page 2 of 2

c. Under current law, states have the flexibility to make programmatic and other budgetary changes to Medicaid and CHIP. CBO estimates that, under the proposal, state spending 

on Medicaid and CHIP would increase by about $34 billion over the 2010-2019 period as a result of the insurance coverage provisions that are reflected in this table. 

d. Includes $5 billion in spending for high-risk insurance pools. 

f. The effects are almost entirely on tax revenues. CBO estimates that outlays for Social Security benefits would increase by about $2 billion over the 2010-2019 period, and that the 

coverage provisions would have negligible effects on outlays for other federal programs. 
Table 3. Preliminary Estimate of the Effects on Direct Spending and Revenues of Divisions B, C, and D and Sections 111, 115,

and 346 of H.R. 3962, the Affordable Health Care for America Act, as Introduced on October 29, 2009

By Fiscal Year, in Billions of Dollars

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

CHANGES IN DIRECT SPENDING

DIVISION B—MEDICARE AND MEDICAID IMPROVEMENTS

TITLE I—IMPROVING HEALTH CARE VALUE

Subtitle A—Provisions Related to Medicare Part A

PART 1—MARKET BASKET UPDATES

1101 Skilled Nursing Facility Payment Update (includes 

interaction with section 1103) -0.4 -0.9 -1.3 -1.6 -1.9 -2.4 -2.9 -3.5 -4.1 -4.8 -6.0 -23.9

1102 Inpatient Rehabilitation Facility Payment Update 

(includes interaction with section 1103) -0.1 -0.2 -0.3 -0.4 -0.4 -0.5 -0.6 -0.8 -0.9 -1.0 -1.4 -5.3

1103 Incorporating Productivity Improvements Into 

Market Basket Updates That Do Not Already 

Incorporate Such Improvements -1.2 -3.5 -5.1 -6.5 -8.0 -10.3 -12.9 -15.4 -18.1 -21.1 -24.2 -102.0

PART 2—OTHER MEDICARE PART A PROVISIONS

1111 Payments to Skilled Nursing Facilities 0 0 0 0 0 0 0 0 0 0 0 0

1112 Medicare DSH Report and Payment Adjustments 

in Response to Coverage Expansion 0 0 0 0 0 0 0 -3.0 -3.5 -3.8 0 -10.3

1113 Extension of Hospice Regulation Moratorium * * 0 0 0 0 0 0 0 0 0.1 0.1

1114 Permitting Physician Assistants to Order Post-Hospital 

Extended Care Services and to Provide for 

Recognition of Attending Physician Assistants as 

Attending Physicians to Serve Hospice Patients * * * * * * * * * * * *

Subtitle B—Provisions Related to Part B

PART 1—PHYSICIANS’ SERVICES

1121 Resource-Based Feedback Program for Physicians 0 0 0 0 0 0 0 0 0 0 0 0

1122 Misvalued Codes Under the Physician Fee Schedule * * * * * * * * * * 0.1 0.2

1123 Payments for Efficient Areas 0 0.1 0.2 0.1 0 0 0 0 0 0 0.4 0.4

1124 Modifications to the Physician Quality Reporting Initiative 0 0 0.5 0.8 0 0 0 0 0 0 1.3 1.3

1125 Adjustment to Medicare Payment Localities 0 * 0.1 0.1 0.1 0.1 0 0 0 0 0.2 0.3

Congressional Budget Office Page 1 of 10 10/29/2009
Table 3. Preliminary Estimate of the Effects on Direct Spending and Revenues of Divisions B, C, and D and Sections 111, 115,

and 346 of H.R. 3962, the Affordable Health Care for America Act, as Introduced on October 29, 2009

By Fiscal Year, in Billions of Dollars

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

PART 2—MARKET BASKET UPDATES

1131 Incorporating Productivity Improvements Into Market 

Basket Updates That Do Not Already Incorporate 

Such Improvements -0.5 -1.2 -1.8 -2.4 -3.0 -3.9 -5.2 -6.5 -7.8 -9.1 -9.0 -41.6

PART 3—OTHER PROVISIONS

1141 Rental and Purchase of Power-Driven Wheelchairs 0 -0.4 -0.1 * * * * -0.1 -0.1 -0.1 -0.6 -0.8

1141A Election to Take Ownership, or to Decline Ownership, 

of Certain Complex Durable Medical Equipment 

After the 13-Month Capped Rental Period Ends 0 0 0 0 0 0 0 0 0 0 0 0

1142 Extension of Payment Rule for Brachytherapy * * * 0 0 0 0 0 0 0 * *

1143 Home Infusion Therapy Report to Congress 0 0 0 0 0 0 0 0 0 0 0 0

1144 Require Ambulatory Surgical Centers to Submit Data 0 0 0 0 0 0 0 0 0 0 0 0

1145 Treatment of Certain Cancer Hospitals 0 0 0 0 0 0 0 0 0 0 0 0

1146 Payment for Imaging Services 0 -0.2 -0.3 -0.3 -0.3 -0.3 -0.3 -0.4 -0.4 -0.4 -1.2 -3.0

1147 Durable Medical Equipment Program Improvements * * * * * * * * * * * 0.1

1148 MedPAC Study and Report on Bone Mass Measurement 0 0 0 0 0 0 0 0 0 0 0 0

1149 Timely Access to Post-Mastectomy Items * * * * * * * * * * * *

1149A Payment for Biosimilar Biological Products Included in estimate for section 2565

1149B Study and Report on DME Competitive Bidding Process 0 0 0 0 0 0 0 0 0 0 0 0

Subtitle C—Provisions Related to Medicare Parts A and B

1151 Reducing Potentially Preventable Hospital Readmissions * * -0.3 -0.6 -1.2 -1.3 -1.4 -1.4 -1.5 -1.6 -2.0 -9.3

1152 Post-Acute-Care Services Payment Reform Plan 

and Bundling Pilot Program * * * * 0 0 0 0 0 0 * *

1153 - 

1155 Home Health Changes -0.7 -2.8 -3.8 -4.4 -5.0 -5.9 -6.8 -7.9 -9.1 -10.3 -16.7 -56.7

1155A MedPAC Study on Variation in Home Health Margins 0 0 0 0 0 0 0 0 0 0 0 0

1155B Home Health: Initial Assessment Visit for 

Rehabilitation Cases 0 * * * * * * * * * * *

1156 Limitation on Medicare Exceptions to the Prohibition on 

Certain Physician Referrals Made to Hospitals * * -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.2 -0.2 -0.3 -1.0

1157 Study of Geographic Adjustment Factors 0 0 0 0 0 0 0 0 0 0 0 0

1158 Revision of Medicare Payment Systems to Address 

Geographic Inequities 0 0 2.7 2.7 -14.1 -5.6 0 0 0 0 -8.7 -14.3

1159 Study of Geographic Variation in Health Care Spending and 

Promoting High-Value Health Care * * 0 0 0 0 0 0 0 0 * *

1160 Implementation, and Congressional Review, of Proposal 

to Revise Medicare Payments to Promote 

High-Value Health Care 0 0 0 0 0 0 0 0 0 0 0 0

Congressional Budget Office Page 2 of 10 10/29/2009
Table 3. Preliminary Estimate of the Effects on Direct Spending and Revenues of Divisions B, C, and D and Sections 111, 115,

and 346 of H.R. 3962, the Affordable Health Care for America Act, as Introduced on October 29, 2009

By Fiscal Year, in Billions of Dollars

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Subtitle D—Medicare Advantage Reforms

PART 1—PAYMENT AND ADMINISTRATION

1161 Phase-In of Payment Based on Fee-for-Service Costs, 

and Quality Bonus Payments 0 -4.7 -10.2 -14.8 -17.7 -18.9 -19.8 -21.1 -22.7 -24.4 -47.5 -154.3

1162 Coding Intensity Adjustment 0 -0.2 -0.6 -0.9 -1.2 -1.6 -2.0 -2.5 -3.0 -3.5 -2.9 -15.5

1163 Simplification of Annual Beneficiary Election Periods 0 0 0 0 0 0 0 0 0 0 0 0

1164 Extension of Reasonable Cost Contracts 0 * * 0 0 0 0 0 0 0 * *

1165 Limitation of Waiver Authority for Employer Group Plans 0 0 0 0 0 0 0 0 0 0 0 0

1166 Improving Risk Adjustment for Payments 0 0 0 0 0 0 0 0 0 0 0 0

1167 Elimination of MA Regional Plan Stabilization Fund 0 0 0 0 -0.2 -0.1 0 0 0 0 -0.2 -0.2

1168 Study Regarding Calculation of Medicare Advantage 

Payment Rates 0 0 0 0 0 0 0 0 0 0 0 0

PART 2—BENEFICIARY PROTECTIONS AND ANTI-FRAUD

1171 Limitation on Cost-Sharing for Individual Health Services 0 0 0 0 0 0 0 0 0 0 0 0

1172 Continuous Open Enrollment for Enrollees in Plans 

With Enrollment Suspension 0 0 0 0 0 0 0 0 0 0 0 0

1173 Information on MA Plan Administrative Costs 0 0 0 0 0 0 0 0 0 0 0 0

1174 Strengthening Audit Authority 0 0 0 0 0 0 0 0 0 0 0 0

1175 Authority to Deny Plan Bids 0 0 0 0 0 0 0 0 0 0 0 0

1175A State Authority to Enforce Standardized 

Marketing Requirements 0 0 0 0 0 0 0 0 0 0 0 0

PART 3—TREATMENT OF SPECIAL NEEDS PLANS

1176 - 

1178 Special Needs Plans 0 0.1 0.1 * * * * * * * 0.2 0.1

Subtitle E—Improvements to Medicare Part D

1181 - Elimination of Coverage Gap; Discounts for Certain 

1182 Part D Drugs in Original Coverage Gap 0.1 -7.1 -5.3 -4.9 -3.9 -4.1 -3.4 -4.6 -5.4 -3.7 -21.1 -42.3

1183 Submission of Claims by Pharmacies Located in 

or Contracting With Long-Term Care Facilities 0 0 0 0 0 0 0 0 0 0 0 0

1184 Including Costs Incurred by AIDS Drug Assistance 

Programs and Indian Health Service in Providing 

Prescription Drugs Toward the Annual 

Out-of-Pocket Threshold Under Part D 0 * 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.8

1185 No Mid-Year Formulary Changes Permitted 0 0 0 0 0 0 0 0 0 0 0 0

1186 Negotiation of Lower Covered Part D Drug Prices on 

Behalf of Medicare Beneficiaries 0 0 0 0 0 0 0 0 0 0 0 0

1187 Accurate Dispensing in Long-Term Care Facilities 0 0 -0.1 -0.3 -0.5 -0.8 -1.0 -1.0 -0.9 -1.1 -1.0 -5.7

1188 Free Generic Fill 0 -0.2 -0.3 -0.3 -0.3 -0.3 -0.4 -0.4 -0.4 -0.4 -1.1 -3.0

1189 State Certification Prior to Waiver of Licensure Requirements 

Under Medicare Prescription Drug Program 0 0 0 0 0 0 0 0 0 0 0 0

Congressional Budget Office Page 3 of 10 10/29/2009
Table 3. Preliminary Estimate of the Effects on Direct Spending and Revenues of Divisions B, C, and D and Sections 111, 115,

and 346 of H.R. 3962, the Affordable Health Care for America Act, as Introduced on October 29, 2009

By Fiscal Year, in Billions of Dollars

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Subtitle F—Medicare Rural Access Protections

1191 Telehealth Expansion and Enhancements * * * * * * * * * * * *

1192 Extension of Outpatient Hold Harmless Provision 0.1 0.1 * 0 0 0 0 0 0 0 0.2 0.2

1193 Extension of Section 508 Hospital Reclassifications 0.2 0.3 * 0 0 0 0 0 0 0 0.5 0.5

1194 Extension of Geographic Floor for Work 0.3 0.5 0.2 0 0 0 0 0 0 0 1.1 1.1

1195 Extension of Payment for Technical Component of 

Certain Physician Pathology Services * 0.1 * 0 0 0 0 0 0 0 0.1 0.1

1196 Extension of Ambulance Add-Ons 0.1 0.1 * 0 0 0 0 0 0 0 0.2 0.2

TITLE II—MEDICARE BENEFICIARY IMPROVEMENTS

Subtitle A—Improving and Simplifying Financial Assistance for Low Income Medicare Beneficiaries

1201 - 

1207 Medicare Savings Program and Low-Income Subsidy Program

Effects on Medicare spending 0.1 0.3 0.6 1.0 1.2 1.3 1.6 1.7 1.8 2.2 3.2 11.8

Effects on Medicaid spending 0 0 0.1 0.2 0.2 0.2 0.2 0.2 0.3 0.3 0.4 1.7

Subtitle B—Reducing Health Disparities

1221 Ensuring Effective Communication in Medicare * * 0 0 0 0 0 0 0 0 * *

1222 Demonstration to Promote Access for Medicare Beneficiaries 

With Limited English Proficiency 0 * * * * * 0 0 0 0 * *

1223 Report on Impact of Language-Access Services 0 0 0 0 0 0 0 0 0 0 0 0

1224 Definitions 0 0 0 0 0 0 0 0 0 0 0 0

Subtitle C—Miscellaneous Improvements

1231 Extension of Therapy Caps Exceptions Process 0.6 0.9 0.2 0 0 0 0 0 0 0 1.7 1.7

1232 Extended Months of Coverage of Immunosuppressive 

Drugs and Other Renal Dialysis Provisions 0 * * * * * * * * * * -0.1

1233 Voluntary Advance Care Planning Consultation 0 0.1 0.2 0.2 0.2 0.2 0.2 0.3 0.3 0.3 0.6 1.9

1234 Part B Special Enrollment Period and Waiver of Limited 

Enrollment Penalty for TRICARE Beneficiaries * * * * * * * * * * * *

1235 Exception for Use of More Recent Tax Year in Case of 

Gains From Sale of Primary Residence in Computing 

Part B Income-Related Premium * * * * * * * * * * * *

1236 Demonstration Program: Patient Decisions Aids * * * * * * * * * * * *

Congressional Budget Office Page 4 of 10 10/29/2009
Table 3. Preliminary Estimate of the Effects on Direct Spending and Revenues of Divisions B, C, and D and Sections 111, 115,

and 346 of H.R. 3962, the Affordable Health Care for America Act, as Introduced on October 29, 2009

By Fiscal Year, in Billions of Dollars

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

TITLE III—PROMOTING PRIMARY CARE, MENTAL HEALTH SERVICES, AND COORDINATED CARE

1301 Accountable Care Organization Pilot Program 0 0 * * -0.1 -0.3 -0.3 -0.4 -0.7 -0.8 -0.2 -2.6

1302 Medical Home Pilot Program 0.2 0.3 0.3 0.3 0.3 0.2 0.1 * 0 0 1.5 1.8

1303 Payment Incentive for Selected Primary Care Services 0.2 0.4 0.4 0.4 0.5 0.5 0.5 0.5 0.6 0.6 2.0 4.7

1304 Payment for Certified Nurse-Midwives * * * * * * * * * * * *

1305 Coverage and Waiver of Cost-Sharing for 

Preventive Services 0.1 0.2 0.2 0.2 0.3 0.3 0.3 0.3 0.4 0.4 1.0 2.7

1306 Waive Deductible for Colorectal Cancer Screening Tests 0 0 0 0 0 0 0 0 0 0 0 0

1307 Excluding Clinical Social Worker Services From Coverage 

Under the Medicare Skilled Nursing Facility Prospective 

Payment System and Consolidated Payment 0 0 0 0 0 0 0 0 0 0 0 0

1308 Coverage of Marriage and Family Therapist Services and 

Mental Health Counselor Services * * * * * * * 0.1 0.1 0.1 0.1 0.4

1309 Extension of Physician Fee Schedule Mental Health 

Add-On * * * 0 0 0 0 0 0 0 0.1 0.1

1310 Expanding Access to Vaccines 0 * * 0.1 0.1 0.1 0.2 0.2 0.3 0.4 0.2 1.4

1311 Expansion of Medicare-Covered Preventive Services at 

Federally Qualified Health Centers * * * * * * * * * * 0.1 0.1

1312 Independence at Home Demonstration Program * * * * * * 0 0 0 0 * *

1313 Recognition of Certified Diabetes Educators as Providers * * * * * * * * * * * *

TITLE IV—QUALITY

Subtitle A—Comparative Effectiveness Research

1401 Comparative Effectiveness Research (effects on outlays)

Medicare * 0.1 0.1 * * * * -0.1 -0.1 -0.2 0.2 -0.1

Non-Medicare 0 * * 0.1 0.2 0.2 0.2 0.2 0.2 0.1 0.3 1.2

Subtitle B—Nursing Home Transparency * * * 0 0 0 0 0 0 0 0.1 0.1

Subtitle C—Quality Measurements * * 0.1 0.1 0.1 * * 0 0 0 0.2 0.3

Subtitle D—Physician Payments Sunshine Provision 0 0 0 0 0 0 0 0 0 0 0 0

Subtitle E—Public Reporting on Health Care-Associated Infections 0 0 * * * * * * * * * *

TITLE V—MEDICARE GRADUATE MEDICAL EDUCATION

1501 - 

1505 Graduate Medical Education Provisions * 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.5 1.5

Congressional Budget Office Page 5 of 10 10/29/2009
Table 3. Preliminary Estimate of the Effects on Direct Spending and Revenues of Divisions B, C, and D and Sections 111, 115,

and 346 of H.R. 3962, the Affordable Health Care for America Act, as Introduced on October 29, 2009

By Fiscal Year, in Billions of Dollars

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

TITLE VI—PROGRAM INTEGRITY

Subtitle A—Increased Funding to Fight Waste, Fraud, and Abuse 0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.4 0.9

Subtitle B—Enhanced Penalties for Fraud and Abuse * * * * * * * * * * -0.1 -0.2

Subtitle C—Enhanced Program and Provider Protections * -0.1 -0.2 -0.2 -0.2 -0.2 -0.2 -0.3 -0.3 -0.3 -0.7 -2.1

Subtitle D—Access to Information Necessary to Prevent 

Fraud, Waste, and Abuse 0 0 0 0 0 0 0 0 0 0 0 0

TITLE VII—MEDICAID AND CHIP

Subtitle A—Medicaid and Health Reform

1701 Eligibility for Individuals With Income Below 150 Percent 

of the Federal Poverty Level Included in estimate for expanding health insurance coverage (except for Medicare cost-sharing assistance).

 Medicare cost sharing assistance - - Medicare effects 0 0 0 0.3 0.6 0.7 0.8 0.9 0.9 1.0 0.9 5.3

 Medicare cost sharing assistance - - Medicaid effects 0 0 0 0.6 0.9 1.0 1.0 1.1 1.2 1.3 1.5 7.2

1702 Special Rules for Certain Medicaid Eligible Individuals Included in estimate for expanding health insurance coverage.

1703 CHIP and Medicaid Maintenance of Eligibility Included in estimate for expanding health insurance coverage.

1704 Reduction in Medicaid DSH * * * * * * * -1.5 -2.5 -6.0 * -10.0

1705 Expanded Outstationing Included in estimate for expanding health insurance coverage.

Subtitle B—Prevention

1711 Required Coverage of Preventive Services * 0.2 0.2 0.8 0.8 1.3 1.5 1.7 1.9 2.1 2.1 10.7

1712 Tobacco Cessation * * * * * * * * * * * 0.1

1713 Optional Coverage of Nurse Home Visitation Services * 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.8

1714 State Eligibility Option for Family Planning Services 0 0 0 0 0 0 0 0 0 0 0 0

Subtitle C—Access

1721 Payments to Primary Care Practitioners 3.3 6.4 5.5 6.5 6.9 6.4 5.7 5.7 5.1 5.4 28.7 57.0

1722 Medical Home Pilot Program * 0.1 0.1 0.1 0.1 * 0 0 0 0 0.5 0.5

1723 Translation or Interpretation Services * * * * * * * * * 0.1 0.1 0.3

1724 Optional Coverage for Freestanding Birth Center Services * * * * * * * * * * * *

1725 Inclusion of Public Health Clinics Under the Vaccines 

for Children Program * 0.1 0.1 0.1 0.1 * * 0 0 0 0.4 0.5

1726 Requiring Coverage of Services of Podiatrists * * * * * * * * * * 0.1 0.2

1726A Requiring Coverage of Services of Optometrists * * * * * * * * * * * 0.1

1727 Therapeutic Foster Care * * * 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.6

1728 Assuring Adequate Payment Levels for Services 0 0 0 0 0 0 0 0 0 0 0 0

1729 Preserving Medicaid Coverage for Youths Upon 

Release From Public Institutions * * 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.6

1730 Quality Measures for Maternity and Adult Health 

Services Under Medicaid and CHIP * * * * * * * * * 0 * *

1730A Accountable Care Organization Pilot Program 0 0 * * * * * * * * * -0.1

1730B FQHC Coverage 0 * 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.4 1.0

Congressional Budget Office Page 6 of 10 10/29/2009
Table 3. Preliminary Estimate of the Effects on Direct Spending and Revenues of Divisions B, C, and D and Sections 111, 115,

and 346 of H.R. 3962, the Affordable Health Care for America Act, as Introduced on October 29, 2009

By Fiscal Year, in Billions of Dollars

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Subtitle D—Coverage

1731 Optional Medicaid Coverage of Low-Income 

HIV-Infected Individuals 0.1 0.4 0.4 0.1 0 0 0 0 0 0 1.1 1.1

1732 Extending Transitional Medicaid Assistance 0 0.2 1.1 1.0 0.1 * 0 0 0 0 2.4 2.4

1733 Requirement of 12-Month Continuous Coverage Under 

Certain CHIP Programs Included in estimate for expanding health insurance coverage.

1734 Preventing the Application Under CHIP of Coverage 

Waiting Periods for Certain Children Included in estimate for expanding health insurance coverage.

1735 Adult Day Health Care Services 0 0 0 0 0 0 0 0 0 0 0 0

1736 Medicaid Coverage for Citizens of 

Freely Associated States * * * * * * * * * * 0.1 0.2

1737 Medicaid Coverage of Nonemergency Transportation to 

Medically Necessary Services * * * * * * * * * * * *

1738 State Option to Disregard Certain Income in Providing

Continued Medicaid Coverage for Certain Individuals 

With Extremely High Prescription Costs * 0.2 0.2 * 0 0 0 0 0 0 0.5 0.5

1739 Community Living Assistance Services and Supports Included in estimate for section 2581.

Subtitle E—Financing

1741 - Medicaid Pharmacy Reimbursement and Prescription 

1743 Drug Rebate Provisions (includes interactions 

with section 2501) -0.4 -1.9 -2.5 -2.7 -2.9 -2.7 -2.8 -2.8 -2.9 -3.0 -10.4 -24.6

1744 Payments for Graduate Medical Education 0 0 0 0 0 0 0 0 0 0 0 0

1745 Nursing Facility Supplemental Payment Program 0.4 1.1 1.5 1.5 1.1 0.4 0 0 0 0 5.6 6.0

1746 Report on Medicaid Payments 0 0 0 0 0 0 0 0 0 0 0 0

1747 Reviews of Medicaid 0 0 0 0 0 0 0 0 0 0 0 0

1748 Extension of Delay in Managed Care Organization 

Provider Tax Elimination 0.4 0 0 0 0 0 0 0 0 0 0.4 0.4

1749 Extension of ARRA Increase in FMAP 0 23.5 0 0 0 0 0 0 0 0 23.5 23.5

Subtitle F—Waste, Fraud, and Abuse

1751 Health Care Acquired Conditions 0 0 * * * * * * * * * *

1752 Evaluations and Reports 0 0 0 0 0 0 0 0 0 0 0 0

1753 Require Providers and Suppliers to Adopt Programs to 

Reduce Waste, Fraud, and Abuse 0 0 0 0 0 0 0 0 0 0 0 0

1754 Overpayments 0.1 0 * 0 * * * * * * 0.1 0.1

1755 Managed Care Organizations 0 0 0 0 0 0 0 0 0 0 0 0

1756 Termination of Provider Participation Under Medicaid and 

CHIP if Terminated Under Certain Other Plans 0 0 0 0 0 0 0 0 0 0 0 0

1757 Medicaid and CHIP Exclusion From Participation Relating 

to Certain Ownership and Other Affiliations 0 0 0 0 0 0 0 0 0 0 0 0

1758 Report Expanded Set of Data Elements Under MMIS 0 0 0 0 0 0 0 0 0 0 0 0

1759 Alternate Payees Required to Register Under Medicaid 0 0 0 0 0 0 0 0 0 0 0 0

1760 Denial of Payments for Litigation-Related Misconduct 0 0 0 0 0 0 0 0 0 0 0 0

1761 Mandatory State Use of National Correct Coding Initiative 0 0 * * * * -0.1 -0.1 -0.1 -0.1 -0.1 -0.3

Subtitle G—Payments to the Territories

Congressional Budget Office Page 7 of 10 10/29/2009
Table 3. Preliminary Estimate of the Effects on Direct Spending and Revenues of Divisions B, C, and D and Sections 111, 115,

and 346 of H.R. 3962, the Affordable Health Care for America Act, as Introduced on October 29, 2009

By Fiscal Year, in Billions of Dollars

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

1771 Payment to Territories 0 0.8 0.9 0.8 0.9 1.0 1.1 1.2 1.2 1.4 3.4 9.3

Subtitle H—Miscellaneous

1781 Technical Corrections 0 0 0 0 0 0 0 0 0 0 0 0

1782 Extension of QI Program 0 0.5 0.7 0.2 0 0 0 0 0 0 1.4 1.4

1783 Assuring Transparency of Information 0 0 0 0 0 0 0 0 0 0 0 0

1784 Medicaid and CHIP Payment and Access Commission 0 0 0 0 0 0 0 0 0 0 0 0

1785 Outreach and Enrollment of Medicaid- and 

CHIP-Eligible Individuals 0 0 0 0 0 0 0 0 0 0 0 0

1786 Prohibitions on Federal Medicaid and CHIP Payment 

for Undocumented Aliens 0 0 0 0 0 0 0 0 0 0 0 0

1787 Demonstration Project for Stabilization of Emergency 

Medical Conditions by Institutions for Mental Diseases * * * 0 0 0 0 0 0 0 0.1 0.1

1788 Application of Medicare Improvement Fund 0 0 0 0 -0.1 -0.2 -0.2 -0.2 -0.2 0 -0.1 -0.7

1789 Treatment of Certain Medicaid Brokers 0 0 0 0 0 0 0 0 0 0 0 0

1790 Rule for Changes Requiring State Legislation 0 0 0 0 0 0 0 0 0 0 0 0

TITLE VIII—REVENUE-RELATED PROVISIONS Estimates provided separately by the Joint Committee on Taxation (see JCX-43-09)

TITLE IX—MISCELLANEOUS PROVISIONS

1901 Repeal of Trigger Provision 0 0 0 0 0 0 0 0 0 0 0 0

1902 Repeal of Comparative Cost Adjustment Program 0 * * * * * * 0 0 0 -0.1 -0.1

1903 Extension of Gainsharing Demonstration * * * * * 0 0 0 0 0 * *

1904 Grants to States for Quality Home Visitation Programs for 

Families With Young Children or Expecting Children * * 0.1 0.2 0.2 0.3 0.3 0.3 0.3 0.3 0.6 1.8

1905 Improved Coordination and Protection for Dual Eligibles 0 0 0 0 0 0 0 0 0 0 0 0

1906 Assessment of Medicare Cost-Intensive Diseases 0 0 0 0 0 0 0 0 0 0 0 0

1907 Center for Medicare and Medicaid Innovation

 Funding for Center (including noncovered benefits) Funding for Center (including noncovered benefits) 0.1 0.2 0.4 0.6 0.7 0.8 0.9 1.0 0.9 0.9 2.0 6.5

 Effect on Medicare spending for benefits Effect on Medicare spending for benefits 0 -0.1 -0.2 -0.4 -0.5 -0.6 -0.9 -1.3 -1.8 -2.3 -1.2 -8.2

1908 Application of Emergency Services Laws 0 0 0 0 0 0 0 0 0 0 0 0

1909 Disregard Under the Supplemental Security Income 

Program of Compensation for Participation in

Clinical Trials for Rare Diseases or Conditions 0 0 0 0 0 0 0 0 0 0 0 0

INTERACTIONS AMONG PROVISIONS

Tricare Interaction -0.1 -0.2 -0.3 -0.3 -0.4 -0.5 -0.6 -0.8 -0.9 -0.8 -1.2 -4.8

Medicare Advantage Interactions 0 -1.1 -1.9 -2.8 -8.8 -7.8 -7.8 -10.3 -12.4 -14.3 -14.6 -67.3

Premium Interactions 0 0.4 0.9 1.5 5.5 4.8 4.6 5.4 6.2 7.0 8.3 36.3

Implementation of Medicare Changes 0.2 * * * * * * * * * 0.3 0.3

Medicare Interactions with Medicaid Provisions 0 0 0 0 0 0 1.8 3.0 3.7 4.0 0 12.4

Medicare Interactions with 340B Provision * * * * * * * * * * * *

SUBTOTAL, DIVISION B 3.9 13.6 -15.6 -22.5 -49.1 -47.5 -47.9 -61.6 -73.8 -84.4 -69.8 -385.0

Congressional Budget Office Page 8 of 10 10/29/2009
Table 3. Preliminary Estimate of the Effects on Direct Spending and Revenues of Divisions B, C, and D and Sections 111, 115,

and 346 of H.R. 3962, the Affordable Health Care for America Act, as Introduced on October 29, 2009

By Fiscal Year, in Billions of Dollars

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

DIVISION C—PUBLIC HEALTH AND WORKFORCE DEVELOPMENT

2001 - Public Health Investment Fund, 

2403 and Prevention and Wellness Trusta

0 1.8 4.4 5.9 7.1 8.2 4.8 0.9 0.2 * 19.2 33.4

2501 - 

2503 340B Drug Discount Programs Included in estimate for sections 1741-1743

2511 School-based Health Clinics 0 0 0 0 0 0 0 0 0 0 0 0

2572 Nutrition labeling at Chain Restaurants and 

Vending Machines 0 0 0 0 0 0 0 0 0 0 0 0

2573 Protecting Consumer Access to Generic Drugs -0.1 -0.1 -0.1 -0.2 -0.1 -0.1 -0.1 -0.2 -0.3 -0.4 -0.7 -1.8

2575 Licensure Pathway for Biosimilar Biological Products 0 0 0 * -0.1 -0.3 -0.6 -1.1 -1.7 -2.5 -0.1 -6.2

2581 Community Living Assistance Services and Supports 0 -3.7 -6.4 -8.7 -9.9 -11.2 -9.6 -8.6 -7.5 -6.8 -28.7 -72.5

SUBTOTAL, DIVISION C -0.1 -2.0 -2.2 -2.9 -3.0 -3.4 -5.6 -8.9 -9.4 -9.7 -10.2 -47.1

DIVISION D—INDIAN HEALTH CARE IMPROVEMENT

TITLE I—AMENDMENTS TO INDIAN LAWS

3101 Scholarship And Loan Repayment Recovery Fund and 

Exemption From Payment From Certain Fees * * * * * * * * * * * *

TITLE II—IMPROVEMENT OF INDIAN HEALTH CARE PROVIDED UNDER THE SOCIAL SECURITY ACT

3201 Expansion of Payments Under Medicare 0 * * * * * * * * * 0.1 0.2

SUBTOTAL, DIVISION D * * * * * * * * * * 0.1 0.2

OTHER (from Division A)

111 Reinsurance Program for Retirees 3.0 5.0 2.0 0 0 0 0 0 0 0 10.0 10.0

115 Administrative Simplification

 Effects on Medicaid spending * * * -0.1 -0.1 -0.2 -0.5 -1.0 -1.1 -1.2 -0.2 -4.2

 Effects on exchange subsidies 0 0 0 * -0.1 -0.4 -0.7 -1.0 -1.1 -1.2 -0.2 -4.6

346 Special Rules for Application to Territories 0 0 0 0.7 0.7 0.7 0.7 0.7 0.7 0.7 1.4 5.0

Total, Changes in Direct Spending 6.8 16.6 -15.8 -24.8 -51.7 -50.7 -53.9 -71.8 -84.7 -95.7 -68.9 -425.6

Congressional Budget Office Page 9 of 10 10/29/2009
Table 3. Preliminary Estimate of the Effects on Direct Spending and Revenues of Divisions B, C, and D and Sections 111, 115,

and 346 of H.R. 3962, the Affordable Health Care for America Act, as Introduced on October 29, 2009

By Fiscal Year, in Billions of Dollars

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

CHANGES IN REVENUES

Fraud, Waste, and Abuse * * * * * * * * * * 0.1 0.2

Effect of Administrative Simplification on Revenuesb

0 -0.1 -0.2 0.1 0.6 1.2 1.9 2.9 3.2 3.3 0.3 12.8

Effects on Revenues of Provisions Involving Comparative Effectiveness, 

Access to Generic Drugs, and Follow-On Biologicals

Income and Medicare payroll taxes (on-budget) * * * * * * 0.1 0.2 0.2 0.3 0.1 0.9

Social Security payroll taxes (off-budget) * * * * * * * 0.1 0.1 0.2 * 0.5

Total, Changes in Revenues (unified budget) * -0.1 -0.1 0.1 0.6 1.3 2.1 3.1 3.6 3.8 0.5 14.4

CHANGES IN DEFICITS

Total, Changes in Deficits (unified budget) 6.8 16.7 -15.7 -24.9 -52.3 -52.0 -55.9 -74.9 -88.3 -99.5 -69.4 -440.0

MEMORANDUM

Non-scorable savings from increased HCFAC spending 0 * -0.1 -0.1 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.4 -1.3

Notes: 

* Between -$50 million and $50 million.

a. The legislation would authorize the appropriation of approximately $34 billion over the 2011-2015 period for public health, prevention, and wellness provisions. Although that spending would not occur

without the enactment of subsequent discretionary appropriations, the House Committee on the Budget has directed CBO to consider such spending as direct spending in this cost estimate.

b. Estimated by the Joint Committee on Taxation. Includes both on-budget and off-budget effects.

AIDS = acquired immune deficiency syndrome; ARRA = American Recovery and Reinvestment Act (Public Law 111-5); CHIP = Children's Health Insurance Program; 

DSH = disproportionate share hospital; DME = durable medical equipment; FMAP = federal medical assistance percentage; FQHC = federally qualified health center; 

HCFAC = health care fraud and abuse control account; HIV = human immunodeficiency virus; MA = Medicare Advantage; MedPAC = Medicare Payment Advisory Commission; 

MMIS = Medicaid Management Information System; PPS = prospective payment system; QI = qualifying individual.

Congressional Budget Office Page 10 of 10 10/29/2009
JOI

Provision Effective 2010 2011 2012 2013 2014 2015 2016 20

I. Reform Proposals

A. Tax on Individual Without Acceptable Health Care

Coverage.................................................................... tyba 12/31/12

B. Election to Satisfy Health Coverage Participation

Requirements............................................................. pba 12/31/12

C. Health Care Contributions of Nonelecting

Employers.................................................................. pba 12/31/12

D. Credit for Small Business Employee Health

Coverage Expenses.................................................... tyba 12/31/12

E. Disclosures to Carry Out Health Insurance Exchange

Subsidies.................................................................... DOE

F. Conform the Definition of Medical Expenses for

Employer-Provided Health Coverage, IncludingHealth Flexible Spending Arrangements and HealthReimbursement Arrangements, Health SavingsAccounts, and Archer MSAs to the Definition forthe Itemized Deduction [2]........................................ eia 12/31/10 --- 0.4 0.6 0.6 0.6 0.6 0.6 0

G. Limit Health Flexible Spending Arrangements in

Cafeteria Plans to $2,500, Indexed to CPI-U............ tyba 12/31/12 --- --- --- 1.5 2.1 2.1 2.0 1

H. Increase the Penalty for Nonqualified Distributions

from Health Savings Accounts to 20%...................... dmd tyba 12/31/10 --- [3] [3] 0.1 0.1 0.1 0.2 0

I. Eliminate Deduction for Expenses Allocable to

Medicare Part D Subsidy [4]..................................... tyba 12/31/10 --- 0.3 0.4 0.4 0.4 0.4 0.3 0

J. Exclusion from Gross Income for Indian Tribe

Health Benefits.......................................................... hbacpa DOE --- --- [5] [5] [5] [5] [5] [

Total of Reform Proposals.......................................................... --- 0.7 1.0 2.6 3.2 3.2 3.1 3

ESTIMATED REVENUE EFFECTS OF POSSIBLE MODIFICATIONS TO THE REVENUE PROVISIONS OF H

Fiscal Years 2010 - 2019

[Billions of Dollars]

THE "AFFORDABLE HEALTH CARE FOR AMERICA ACT"

- - - - - - - - Estimate Provided by the Congressional Budget Office and the - - - - - - - - Estimate Provided by the Congressional Budget Office and the - - - - - - - - Estimate Provided by the Congressional Budget Office and the - - - - - - - - Estimate Provided by the Congressional Budget Office and the - - - - - - - - Estimate Provided by the Congressional Budget Office and the 
Page 2

Provision Effective 2010 2011 2012 2013 2014 2015 2016 20

II. Other Revenue Provisions

A. Impose a 5.4% Surtax on AGI in Excess of

$500,000 ($1,000,000 for joint returns); Not Indexed for Inflation........................................... tyba 12/31/10 --- 30.9 31.7 45.0 49.3 53.2 56.9 60

B. Impose a 2.5% Ad Valorem Excise Tax on First

Taxable Sale of Medical Devices.............................. somda 12/31/12 --- --- --- 1.9 2.7 2.8 3.0 3

C. Require information Reporting on Payments to

Corporations.............................................................. pma 12/31/11 --- --- 0.4 3.3 2.0 2.1 2.2 2

D. Delay Implementation of Worldwide Interest

Allocation Until 2020 ............................................... tyba 12/31/10 --- 0.5 1.4 3.1 3.2 3.3 3.5 3

E. Limit Treaty Benefits for Certain Deductible

Payments.................................................................... pma DOE 0.5 0.7 0.7 0.7 0.7 0.7 0.8 0

F. Codify Economic Substance Doctrine and

Impose Penalties for Underpayments........................ teia DOE 0.1 0.4 0.5 0.6 0.6 0.7 0.7 0

G. Extend Certain Health Benefits Applicable to

Spouses and Dependents to Eligible DesignatedBeneficiaries.............................................................. tyba 12/31/09 -0.2 -0.3 -0.3 -0.4 -0.4 -0.4 -0.4 -0

Total of Other Revenue Provisions ................................................ 0.4 32.2 34.4 54.2 58.1 62.4 66.7 70

III. Re en e Related Pro isions Revenue-Related Provisions

A. Disclosures to Facilitate Identification of

Individuals Likely to be Ineligible for Low-IncomeSubsidies Under the Medicare Prescription DrugProgram to Assist Social Security Administration'sOutreach to Eligible Individuals [6].......................... [7]

B. Impose Fee on Insured and Self-Insured Health

Plans; Comparative Effectiveness Research TrustFund........................................................................... [8] --- --- --- 0.3 0.3 0.3 0.3 0

Total of Revenue-Related Provisions ............................................. --- --- --- 0.3 0.3 0.3 0.3 0

 NET TOTAL ................................................................................. 0.4 32.9 35.4 57.1 61.6 65.9 70.1 74

Joint Committee on Taxation -------------------------------------- NOTE: Details may not add to totals due to rounding.Legend and Footnotes for JCX-43-09 are on the following page

 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - No Revenue Effect - - - - 
Page 3

Legend and Foots for JCX-43-09:Legend for "Effective" column: 

DOE = date of enactment hbacpa = health benefits and coverage provided after somda dmd = disbursements made during pba = periods beginning after teia = eia = expenses incurred after pma = payments made after tyba = 

[1] Estimate included in Preliminary Analysis of the Insurance Coverage Specifications Provided by the House Tri-Committee Group, July 14, 2009, from 

Office to the Honorable Charles B. Rangel, Chairman, Committee on Ways and Means.

[2] Estimate includes interaction effect with FSA cap.[3] Gain of less than $50 million.[4] Estimate includes interaction with other proposals.[5] Loss of less than $50 million.[6] Any change in Medicare Part D outlays associated with this provision would be reflected in the Congressional Budget Office estimate of Title II—Med

Improvements, Subtitle A.

[7] Effective for disclosures made after the date which is 12 months after the date of enactment.[8] Effective with respect to policies and plans for portion of policies or plan years beginning on or after October 1, 2012. 
CONGRESSIONAL BUDGET OFFICE         Douglas W. Elmendorf, Director

U.S. Congress

Washington, DC  20515

November 4, 2009 

Honorable John A. Boehner 

Republican Leader 

U.S. House of Representatives 

Washington, DC 20515 

Dear Mr. Leader: 

The Congressional Budget Office (CBO) and the staff of the Joint Committee on 

Taxation (JCT) have completed a preliminary analysis of the amendment in the 

nature of a substitute for H.R. 3962, the Affordable Health Care for America Act, as 

you proposed on November 3, 2009. For several reasons described later, this 

analysis does not constitute a comprehensive cost estimate for the amendment. 

The amendment includes a number of provisions intended to increase the 

availability and improve the affordability of private health insurance. CBO’s and 

JCT’s preliminary assessment of the amendment’s impact on federal budget deficits 

is summarized in the following table. The enclosures with this letter provide 

estimates of the changes in the number of nonelderly people in the United States 

who would have health insurance, present the primary budgetary effects of the 

amendment’s provisions related to insurance coverage, and give estimates of the 

costs or savings from other proposed changes that would affect the federal 

government’s direct spending and revenues. 

According to CBO and JCT’s assessment, enacting the amendment would result in 

a net reduction in federal budget deficits of $68 billion over the 2010–2019 period. 

That estimate reflects a projected net cost of $8 billion over 10 years for the 

provisions directly related to insurance coverage; that net cost reflects a gross cost 

of $61 billion that is partly offset by about $52 billion in additional revenues 

associated with the coverage provisions. Over the same period, the other provisions 

of the amendment would reduce direct spending by $49 billion and increase tax 

revenues by $27 billion.
Honorable John A. Boehner 

Page 2 

PRELIMINARY ESTIMATE OF THE EFFECTS ON THE DEFICIT OF THE AMENDMENT IN THE NATURE OF 

A SUBSTITUTE TO H.R. 3962, OFFERED BY REPRESENTATIVE BOEHNER 

 By Fiscal Year, in Billions of Dollars 

 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 

2010-

2014

2010-

2019

 

NET CHANGES IN THE DEFICIT FROM INSURANCE COVERAGE PROVISIONS a

 

Effects on the Deficit * * -2 14 -3 3 3 -1 -3 -2 8 8

 

NET CHANGES IN THE DEFICIT FROM OTHER PROVISIONS AFFECTING DIRECT SPENDING 

Effects on the Deficit of 

Changes in Outlays * * -2 -3 -5 -6 -7 -8 -9 -10 -9 -49

 

NET CHANGES IN THE DEFICIT FROM OTHER PROVISIONS AFFECTING REVENUES b

 

Effects on the Deficit of 

Changes in Revenues 0 * * -1 -2 -3 -4 -5 -6 -6 -4 -27

 

NET CHANGES IN THE DEFICIT a

 

Net Increase or Decrease (-) 

in the Budget Deficit * * -4 9 -10 -6 -7 -14 -18 -18 -5 -68

 

Memorandum: 

 Changes from Direct Spending * * -1 15 -4 2 2 -3 -6 -6 10 *

 Changes from Revenues * -1 -3 -5 -6 -8 -10 -11 -12 -13 -15 -68

Sources: Congressional Budget Office and the staff of the Joint Committee on Taxation. 

Notes: Positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit. 

 Components may not sum to totals because of rounding; * = between $0.5 billion and -$0.5 billion. 

a. Does not include effects on spending subject to future appropriations. 

 

b. The changes in revenues include effects on Social Security revenues, which are classified as off-budget. 

The figures presented here do not represent a comprehensive cost estimate for the 

amendment. The analysis does not take into account all of the proposal’s effects on 

spending for other federal programs or the administrative costs for oversight and 

implementation. In addition, the estimates address the amendment’s impact on 

direct spending and revenues but do not include the potential costs of provisions 

that would be subject to future appropriations or that would affect programs that are 

subject to future appropriations. Nevertheless, the estimates reflect the major net 

budgetary effects of the proposal. 

CBO and JCT have assumed that the amendment’s key provisions—including grant 

funds for high-risk pools and reinsurance programs and insurance market reforms—
Honorable John A. Boehner 

Page 3 

would become effective on the date of enactment, which is assumed to be in 

December 2009. Provisions establishing association health plans (AHPs) would 

become effective 12 months after the date of enactment. 

Effects of the Insurance Coverage Provisions 

The amendment contains several provisions that are intended to increase rates of 

insurance coverage by reducing its costs or subsidizing its purchase, including: 

 Regulatory reforms in the small group and nongroup markets, including 

establishing AHPs and individual membership associations, and allowing 

states to establish interstate compacts with a unified regulatory structure; 

 A State Innovations grant program to provide federal payments to states that 

achieve specified reductions in the number of uninsured individuals or in the 

premiums for small group or individually purchased policies; 1

 Federal funding for states to use for high-risk pools in the individual 

insurance market and reinsurance programs in the small group market; and 

 Changes to health savings accounts (HSAs) to allow funds in them to be 

used to pay premiums under certain circumstances, to make net contributions 

to HSAs eligible for the saver’s credit, and to provide a 60-day grace period 

for medical expenses incurred prior to the establishment of an HSA. 

By 2019, CBO and JCT estimate, the number of nonelderly people without health 

insurance would be reduced by about 3 million relative to current law, leaving about 

52 million nonelderly residents uninsured. The share of legal nonelderly residents 

with insurance coverage in 2019 would be about 83 percent, roughly in line with the 

current share. CBO and JCT estimate that enacting the amendment’s insurance 

coverage provisions would increase deficits by $8 billion over the 2010–2019 

period. 

Effects of Other Provisions 

Other provisions of the amendment would alter federal spending and revenues in 

significant ways as well. The key provisions include these: 

 Limits on costs related to medical malpractice (“tort reform”), including 

capping noneconomic and punitive damages and making changes in the 

allocation of liability. CBO expects that those limits would reduce health 

                                                           

1 We expect that states would also spend several billion dollars to help achieve the targets specified under the 

State Innovations program.
Honorable John A. Boehner 

Page 4 

care costs directly—by reducing premiums for medical liability insurance 

and associated costs—and indirectly by slightly reducing the utilization of 

health care services. Over the 2010–2019 period, those changes would 

reduce spending on mandatory programs by about $41 billion and would 

increase revenues by $13 billion as an indirect effect of reducing the costs of 

private health insurance plans (which would result in a shift of some 

workers’ compensation from nontaxable health insurance benefits to taxable 

wages). 

 Requirements that the Secretary of Health and Human Services (HHS) adopt 

and regularly update standards for electronic administrative transactions that 

enable electronic funds transfers, claims management processes, and 

verification of eligibility, among other administrative tasks. Those provisions 

would result in about $6 billion in federal savings in Medicaid. In addition, 

those standards would result in an increase in revenues of about $13 billion 

as an indirect effect of reducing the costs of private health insurance plans. 

 Establishment of an abbreviated approval pathway for follow-on biologics 

(biological products that are highly similar to or interchangeable with their 

brand-name counterparts), which would reduce direct spending by an 

estimated $5 billion and increase revenues by about $1 billion over the 

2010-2019 period. 

 An increase in funding for HHS’s investigations into fraud and abuse, which 

would increase direct spending by an estimated $3 billion during the next 

10 years. 

In total, CBO estimates, the provisions of the amendment not directly related to 

insurance coverage would reduce direct spending by $49 billion, on net, over the 

2010–2019 period and would increase revenues by $27 billion. 

Effects on Health Insurance Premiums 

CBO estimates that the combination of provisions included in the amendment 

would reduce average private health insurance premiums per enrollee in the United 

States relative to what they would be under current law. The average reductions 

would be larger in the markets for small group and individually purchased policies, 

which are the focus of many of the legislation’s provisions. In the small group 

market, which represents about 15 percent of total private premiums, the 

amendment would lower average insurance premiums in 2016 by an estimated 

7 percent to 10 percent compared with amounts under current law. In the market for 

individually purchased insurance, which represents a little more than 5 percent of 

total private premiums, the amendment would lower average insurance premiums in 
Honorable John A. Boehner 

Page 5 

2016 by an estimated 5 percent to 8 percent compared with amounts under current 

law. And in the large group market, which represents nearly 80 percent of total 

private premiums, the amendment would lower average insurance premiums in 

2016 by zero to 3 percent compared with amounts under current law, according to 

CBO’s estimates. The figures are presented for 2016 as an illustrative example. 

Two caveats regarding those estimates bear emphasis: 

 Many individuals and families would experience changes in premiums that 

differed from the changes in average premiums in their insurance market. As 

explained below, some provisions of the legislation would tend to decrease 

the premiums paid by all insurance enrollees, while other provisions would 

tend to increase the premiums paid by less healthy enrollees or would tend to 

increase the premiums paid by enrollees in some states relative to enrollees 

in other states. As a result, some individuals and families within each market 

would see reductions in premiums that would be larger or smaller than the 

estimated average reductions, and some people would see increases. 

 The estimates of changes in average premiums are very preliminary and are 

subject to an unusually high degree of uncertainty, even compared with the 

significant uncertainty attending estimates of the effects of proposals making 

broad changes in the nation’s health care and health insurance systems. 

Although the estimated budgetary effects of such proposals incorporate 

changes in aggregate premiums, disentangling the array of factors that affect 

premiums and estimating their overall effect on premiums per enrollee in 

different insurance markets is difficult. In response to many requests, CBO is 

now working to provide that sort of analysis for a number of health care 

reform proposals being discussed in the Congress. For proposals that make a 

number of complex and interrelated changes in the health care and health 

insurance systems, the challenge of estimating the effects on premiums is 

especially acute, and CBO has not yet finished that analysis. For proposals 

with a comparatively limited number of policy changes, like the amendment 

you proposed, the analysis is somewhat more straightforward. Still, the 

estimates reported here are tentative and could be revised as CBO continues 

its analysis of the many avenues through which elements of reform proposals 

might affect insurance premiums. 

The changes in average premiums per enrollee that are expected to occur under the 

amendment can be attributed to three broad sources: 

 Changes in the price of a given amount of insurance coverage for a given 

group of enrollees, 
Honorable John A. Boehner 

Page 6 

 Changes in the extent of insurance coverage purchased, and 

 Changes in the distribution of enrollees with different characteristics among 

the various insurance markets and in the uninsured population. 

The first source encompasses factors that affect an “apples-to-apples” comparison 

of the average price of equivalent insurance coverage for an equivalent population 

under the amendment and under current law. Provisions in the amendment that 

belong in this category include the medical malpractice reforms and the 

requirements for administrative simplification assigned to the Secretary of HHS. 

Those changes would reduce spending related to the delivery of health care services 

and would thereby reduce health insurance premiums without substantially 

changing the amount of coverage provided or the mix of enrollees covered. 

Similarly, the amendment’s subsidies for reinsurance in the small group market 

would reduce the average premiums charged in that market because those subsidies 

would reduce the net costs that insurers incurred to provide that coverage. 

The second source of change in average insurance premiums is changes in the 

average extent of coverage purchased. Those changes can reflect both changes in 

the scope of insurance coverage—the benefits or services that are included—and 

changes in the share of costs for covered services paid by the insurer—known as the 

“actuarial value.” With other factors held equal, insurance policies that cover more 

benefits or services or have smaller copayments or deductibles have higher 

premiums, while policies that cover fewer benefits or services or have larger 

copayments or deductibles have lower premiums. Provisions in the amendment that 

would reduce insurance premiums by affecting the amount of coverage purchased 

include the State Innovations program, which would encourage states to reduce the 

number and extent of benefit mandates that they impose, and provisions that would 

allow individuals or affiliated groups to purchase insurance policies in other states 

that have less stringent mandates. CBO’s assessment was that the amendment 

would not have a substantial effect on actuarial values. However, that assessment 

represents an important source of uncertainty in this analysis of effects on 

premiums, because some of the savings from avoiding state mandates of benefits 

might be used to purchase coverage with a higher actuarial value. 

The third source of change in average insurance premiums is changes in the 

characteristics of the people who are enrolled in different insurance pools. If 

relatively healthy people join an insurance pool, then the average insurance 

premiums for that pool would tend to decline; conversely, an influx of relatively 

unhealthy people would tend to raise premiums for that pool. For example, 

provisions in the amendment that promote the automatic enrollment of workers in 
Honorable John A. Boehner 

Page 7 

health insurance and the coverage of dependents under age 26 in family policies 

would act to improve the average health status of both the small group and large 

group insurance markets and thereby reduce average premiums per enrollee in those 

markets.2

As another example of that third source of premium changes, the State Innovations 

program would induce states to take some actions affecting the average health status 

of people with insurance and people without insurance. For example, states that 

loosened rating rules in the market for individually purchased insurance to allow 

premiums to vary more on the basis of age would cause premiums for older people 

to increase and premiums for younger people to decrease. With other factors held 

equal, fewer older people (who tend to have higher health care costs) and more 

young people (who tend to have lower health care costs) would then sign up for 

coverage, and the improved average health status of insured people would lower 

average premiums; at the same time, the pool of people without health insurance 

would end up being less healthy, on average, than under current law.3

Effects of the Proposal Beyond the First 10 Years 

Although CBO does not generally provide cost estimates beyond the 10-year budget 

projection period (2010 through 2019 currently), many Members have requested 

CBO analyses of the long-term budgetary impact of broad changes in the nation’s 

health care and health insurance systems. However, a detailed year-by-year 

projection, like those that CBO prepares for the 10-year budget window, would not 

be meaningful because the uncertainties involved are simply too great. CBO has 

therefore developed a rough outlook for the decade following the 10-year budget 

window by considering which provisions of the amendment would persist beyond 

2019 and assessing the rate at which the budgetary impact of those provisions is 

likely to change over time. 

All told, the amendment would reduce the federal deficit by $18 billion in 2019, 

CBO and JCT estimate. As a rough approximation, CBO assumes that the effect of 

the proposal on budget deficits would grow at roughly the rate of health care 

spending during the following decade. Consequently, CBO expects that the 

legislation would slightly reduce federal budget deficits in that decade relative to 

those projected under current law—with a total effect during that decade that is in a 

broad range between zero and one-quarter percent of gross domestic product. The 

imprecision of that calculation reflects the even greater degree of uncertainty that 

                                                           

2 The increase in the number of dependents covered would tend to raise premiums for family policies, but 

premiums per enrollee would decline, reflecting the better-than-average health of the new enrollees.

3

 For further discussion of this issue, see Congressional Budget Office, Key Issues in Analyzing Major Health 

Insurance Proposals (December 2008), pp. 82–84. 
Honorable John A. Boehner 

Page 8 

attends to it, compared with CBO’s 10-year budget estimates, and the effects of the 

amendment could fall outside of that range. 

Many Members have expressed interest in the effects of reform proposals on 

various measures of spending on health care. CBO uses the term “federal budgetary 

commitment to health care” to describe the sum of net federal outlays for health 

programs and tax preferences for health care—a broad measure of the resources 

committed by the federal government.4

 Because essentially all of the budgetary 

effects of the amendment involve federal spending for health care or subsidies for 

health care conveyed through reductions in federal tax expenditures, the effects of 

the amendment on federal deficits also represent its effects on the federal budgetary 

commitment to health care. Therefore, during both the 10-year budget window and 

the following decade, the amendment would decrease the federal budgetary 

commitment to health care, relative to the amounts under current law. 

Members have also requested information about the effect of proposals on national 

health expenditures. However, CBO does not analyze those expenditures as closely 

as it does the federal budget, and at this point, the agency has not assessed the net 

effect of the amendment on them, either within the 10-year budget window or for 

the subsequent decade. 

 

I hope this preliminary analysis is helpful in your consideration of the amendment 

in the nature of a substitute for H.R. 3962, the Affordable Health Care for America 

Act. If you have any questions, please contact me or CBO staff. The primary staff 

contacts for this analysis are Bruce Vavrichek and Jean Hearne. 

 Sincerely, 

 Douglas W. Elmendorf 

 Director 

Enclosures 

cc: Honorable Nancy Pelosi 

 Speaker 

U.S. House of Representatives 

                                                           

4

 For an extensive discussion of this term, see Congressional Budget Office, Letter to the Honorable Max 

Baucus regarding different measures for analyzing current proposals to reform health care (October 30, 

2009). 
Honorable John A. Boehner 

Page 9 

Honorable Charles B. Rangel 

Chairman 

Committee on Ways and Means 

Honorable Dave Camp 

Ranking Member 

Honorable Henry A. Waxman 

Chairman 

Committee on Energy and Commerce 

Honorable Joe Barton 

Ranking Member 

Honorable George Miller 

Chairman 

Committee on Education and Labor 

Honorable John Kline 

Senior Republican 
Preliminary Analysis of the Insurance Coverage Provisions Contained in Rep. Boehner's Amendment to H.R. 3962

EFFECTS ON INSURANCE COVERAGE /a 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

(Millions of nonelderly people, by calendar year)

 Current Law Medicaid & CHIP 40 39 39 38 35 34 35 35 35 35

 Coverage /b Employer 150 153 156 158 161 162 162 162 162 162

Nongroup & Other /c 27 26 25 26 28 29 29 29 30 30

Uninsured /d 50 51 51 51 51 51 52 53 53 54

TOTAL 267 269 271 273 274 276 277 279 281 282

 Change (+/-) Medicaid/CHIP 0 * * * * * * * * *

Employer * 1 2 2 2 2 2 2 2 2

Nongroup/Other /c * * * * * * * * * *

Uninsured /d * -1 -2 -2 -2 -2 -2 -3 -3 -3

Post-Policy Uninsured Population

 Number of Nonelderly People /d 50 50 49 48 48 49 49 50 51 52

 Insured Share of the Nonelderly Population /a

 Including All Residents 81% 81% 82% 82% 82% 82% 82% 82% 82% 82%

 Excluding Unauthorized Immigrants 83% 84% 84% 84% 84% 84% 84% 84% 84% 83%

Sources: Congressional Budget Office and the staff of the Joint Committee on Taxation. 

Note: CHIP = Children's Health Insurance Program; * = fewer than 0.5 million people. 

a. Figures for the nonelderly population include only residents of the 50 states and the District of Columbia. 

b. Figures reflect average annual enrollment; individuals reporting multiple sources of coverage are assigned a primary source. 

c. Other includes Medicare; the effects of the proposal are almost entirely on nongroup coverage. 11/4/2009

d. The count of uninsured people includes unauthorized immigrants as well as people who are eligible for, but not enrolled in, Medicaid. Page 1 of 2
Preliminary Analysis of the Insurance Coverage Provisions Contained in Rep. Boehner's Amendment to H.R. 3962

EFFECTS ON THE FEDERAL DEFICIT / a,b,c 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010-2019

(Billions of dollars, by fiscal year)

 Funding for Reinsurance & High-Risk Pools 0 1 1 1 2 3 4 4 4 4 24

 State Innovations Program 0 0 0 17 0 5 6 2 0 1 32

 Provisions Affecting Health Savings Accounts 0 0 0 0 0 1 1 1 1 1 5

 Gross Cost of Coverage Provisions 0 1 2 19 2 9 10 6 5 6 61

 Associated Effects on Tax Revenues /d 0 -1 -3 -4 -4 -6 -6 -7 -7 -7 -46

 Associated Effects on Medicaid & CHIP Outlays /e 0 0 -1 -1 -1 -1 -1 -1 -1 -1 -6

0 0 -2 14 -3 3 3 -1 -3 -2 8

Sources: Congressional Budget Office and the staff of the Joint Committee on Taxation. 

Note: CHIP = Children's Health Insurance Program. 

a. Does not include federal adminstrative costs subject to appropriation or account for all effects on other federal programs. 

b. Positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit; increases in tax revenues reduce the deficit.

c. Components may not sum to totals because of rounding. 

11/4/2009

e. Effects are mainly due to changes in Medicaid and CHIP enrollment resulting from the provisions affecting the private health insurance market. Page 2 of 2

d. Effects are mainly due to changes in taxable compensation resulting from changes in payments for employer-sponsored insurance coverage.

 NET COST OF COVERAGE PROVISIONS
Preliminary Estimate of Direct Spending and Revenue Effects of the Amendment in the Nature of A Substitute 

to H.R. 3962 offered by Rep. Boehner on Medicare, Medicaid, and Other Provisions 

(Billions of dollars, by fiscal year)

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010-

2014

2010-

2019

Changes in Direct Spending

Sec. 113 Administrative Simplification * * -0.1 -0.1 -0.2 -0.3 -0.7 -1.4 -1.5 -1.6 -0.4 -5.9

Sec. 301-310 Effects of Tort Reform on Mandatory 

Program Spending a

0 -0.7 -1.8 -3.2 -4.6 -5.4 -5.9 -6.0 -6.3 -7.0 -10.3 -40.9

Sec. 601 Increased funding to the HHS OIG and 

HCFAC

0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.3 0.4 1.5 3.1

Sec. 603 - 605 Other Medicare and Medicaid program 

integrity provisions

* * * * * * * * * * -0.1 -0.3

Sec. 701 Licensure Pathway for Biosimilar 

Biological Products

0 0 0 * -0.1 -0.2 -0.5 -0.9 -1.4 -2.0 -0.1 -5.1

Total Changes in Direct Spending 0.2 -0.4 -1.6 -3.1 -4.6 -5.7 -6.8 -8.0 -9.0 -10.3 -9.4 -49.1

Changes in Revenues

Effects of Tort Reform 0 0.2 0.6 1.0 1.5 1.7 1.8 1.9 2.1 2.2 3.2 13.0

Effects of Administrative Simplification 0 -0.2 -0.2 0.1 0.6 1.2 2.0 2.9 3.3 3.4 0.3 13.1

Effects of Biosimilar Biological Products 0 0 0 * * 0.1 0.1 0.2 0.2 0.3 * 0.9

Total Changes in Revenues 0 * * 1.1 2.1 2.9 3.9 5.0 5.6 5.9 3.5 27.0

Changes in Deficits 0.2 -0.4 -2.0 -4.2 -6.7 -8.6 -10.7 -13.0 -14.6 -16.3 -13.0 -76.1

Memorandum Non-scoreable savings from HCFAC funding -0.1 -0.2 -0.4 -0.5 -0.5 -0.5 -0.5 -0.5 -0.5 -0.6 -1.8 -4.4

NOTES: * = between $50 million and -$50 million.

HHS = Department of Health and Human Services; OIG = Office of Inspector General; HCFAC = health care fraud and abuse control account

a. Estimate reflects mandatory spending across all federal health programs, and includes Medicare interactions (for Medicare Advantage and Part B premiums).
CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director

U.S. Congress 

Washington, DC 20515 

November 19, 2009 

Honorable Paul Ryan 

Ranking Member 

Committee on the Budget 

U.S. House of Representatives 

Washington, DC 20515 

Dear Congressman: 

This letter responds to questions you have asked about Medicare’s payments to 

physicians and the budgetary effects of H.R. 3961, the Medicare Physicians Payment 

Reform Act of 2009, as introduced on October 29, 2009. In particular, you inquired about 

the budgetary impact of a new regulation specifying how payments to physicians should 

be determined under current law and about the total budgetary impact of enacting both 

H.R. 3961 and H.R. 3962, the Affordable Health Care for America Act. 

The New Rule Governing Medicare’s Payments to Physicians 

On October 30, 2009, the Centers for Medicare and Medicaid Services promulgated a 

final rule, “Payment Policies Under the Physician Fee Schedule and Other Revisions to 

Part B for CY 2010.” 1

 That rule removes physician-administered (P-A) drugs from the 

calculation of the sustainable growth rate (SGR) formula, which determines the updates 

to payment rates for physicians’ services. Removal of P-A drugs from the SGR will 

increase Medicare’s spending for fee-for-service physicians’ services and the Medicare 

Advantage (MA) program, as well as the Department of Defense’s outlays for the 

TRICARE program. Because beneficiaries enrolled in Part B of Medicare pay premiums 

that offset about 25 percent of the costs of their benefits, premium income will rise to 

offset part of the added costs. On net, the Congressional Budget Office (CBO) estimates 

that this new rule will increase federal spending by $78 billion over the 2010–2019 

period. 

The Budgetary Impact of Enacting Both H.R. 3961 and H.R. 3962 

Under current law, including the new rule, Medicare’s payment rates for physicians’ 

services will be reduced by about 21 percent in January 2010, and CBO estimates those 

payment rates will be reduced by about 2 percent annually for several subsequent years. 

H.R. 3961 would increase those payment rates by 1.2 percent in 2010 and restructure the 

                                                           

1 See http://www.federalregister.gov/OFRUpload/OFRData/2009-26502_PI.pdf. The final rule removed spending for physicianadministered drugs from the SGR calculations, specified the Medicare economic index for 2010, and made numerous other 

changes to the physician fee schedule.
Honorable Paul Ryan 

Page 2 

SGR beginning in 2011. Those changes would result in significantly higher payment 

rates for physicians than those that would result under current law. CBO estimates that 

enacting H.R. 3961, by itself, would cost $210 billion over the 2010–2019 period.2

H.R. 3962, the Affordable Health Care for America Act, would establish a mandate for 

most legal residents of the United States to obtain health insurance, set up insurance 

“exchanges” through which certain individuals could receive federal subsidies toward the 

purchase of such insurance, and make numerous other changes in the health insurance 

system, in federal health care programs, and in the federal tax code. CBO and the staff of 

the Joint Committee on Taxation estimate that enacting H.R. 3962, by itself, would 

reduce federal budget deficits by $109 billion over the 2010–2019 period through its 

effects on direct spending and revenues.3

CBO estimates that enacting both H.R. 3961 and H.R. 3962 would add $89 billion to 

budget deficits over the 2010–2019 period. That amount is about $12 billion less than the 

sum of the effects of enacting the bills separately. The $12 billion difference results from 

two types of interactions. The higher payment rates for physicians’ services under 

H.R. 3961 would increase the net cost of provisions in H.R. 3962 by about $3 billion. 

However, that difference would be more than offset by the effect of a change under 

H.R. 3962 in how payment rates for Medicare Advantage plans are set. That change 

would reduce the effect of the changes made by H.R. 3961 to Medicare’s payments for 

physicians’ services in the fee-for-service sector on payment rates for Medicare 

Advantage plans. As a result, the estimated increase in payments to Medicare Advantage 

plans would be $15 billion smaller if both bills were enacted than under H.R. 3961 alone. 

You also asked about the long-term effects on the federal budget of enacting both bills. A 

detailed year-by-year projection, like those that CBO prepares for the 10-year budget 

window, would not be meaningful because the uncertainties involved are simply too 

great. Among other factors, 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 

(such as advances in medical research, technological developments, and changes in 

physicians’ practice patterns)—that are likely to be significant but are very difficult to 

predict, both under current law and under any proposal. 

CBO has therefore developed a rough outlook for the decade following the 10-year 

budget window. The agency estimates that the two bills together would cost about 

$32 billion more in 2019 than H.R. 3962 alone and that the combination of the two bills 

would increase the budget deficit in 2019 by $23 billion relative to current law. Those 

                                                           

2

See CBO’s cost estimate for H.R. 3961 (November 4, 2009) at http://www.cbo.gov/ftpdocs/107xx/doc10704/hr3961.pdf . 

3

See CBO’s cost estimate for H.R. 3962 (November 6, 2009) at http://www.cbo.gov/ftpdocs/107xx/doc10710/

hr3962Dingell_mgr_amendment_update.pdf .  
Honorable Paul Ryan 

Page 3 

increments would grow during the following decade. As stated in its October 29, 2009, 

letter to Congressman Charles B. Rangel, “CBO expects that [H.R. 3962] would slightly 

reduce federal budget deficits in that decade relative to those projected under current 

law—with a total effect during that decade that is in a broad range between zero and onequarter percent of GDP [gross domestic product].” If both H.R. 3961 and H.R. 3962 were 

enacted, CBO expects that federal budget deficits during the decade following the 

10-year budget window would increase relative to those projected under current law—

with a total effect during that decade that is in a broad range between zero and onequarter percent of GDP. 

If you wish further details, CBO would be happy to provide them. The staff contacts for 

this estimate are Lori Housman and Tom Bradley. 

Sincerely, 

Douglas W. Elmendorf 

Director 

cc: Honorable John M. Spratt, Jr. 

 Chairman, Committee on the Budget 

Honorable Charles B. Rangel 

 Chairman, Committee on Ways and Means 

Honorable Dave Camp 

Ranking Member 

Honorable George Miller 

Chairman, Committee on Education and Labor 

Honorable John Kline 

Senior Republican 

Honorable Henry A. Waxman 

Chairman, Committee on Energy and Commerce 

Honorable Joe Barton 

Ranking Member 
www.cbo.gov

CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director 

U.S. Congress 

Washington, DC 20515 

December 19, 2009 

Honorable Harry Reid 

Majority Leader 

United States Senate 

Washington, DC 20510 

Dear Mr. Leader:

The Congressional Budget Office (CBO) and the staff of the Joint Committee on 

Taxation (JCT) have estimated the direct spending and revenue effects of the Patient 

Protection and Affordable Care Act (PPACA), Senate Amendment 2786 in the nature of 

a substitute to H.R. 3590 (as printed in the Congressional Record on November 19, 

2009), incorporating the effects of changes proposed in the manager’s amendment 

released on December 19, 2009. This estimate does not include the effects of other 

amendments adopted during the Senate’s consideration of the Patient Protection and 

Affordable Care Act; it also does not reflect an incremental effect on PPACA from 

Congressional action on H.R. 3326, the Department of Defense Appropriations Act, 

2010, which was cleared on November 19, 2009.1

 Throughout this letter, references to 

“the legislation” mean the act as originally proposed and incorporating the manager’s 

amendment. 

Among other things, the legislation would establish a mandate for most legal residents of 

the United States to obtain health insurance; set up insurance exchanges through which 

certain individuals and families could receive federal subsidies to substantially reduce the 

cost of purchasing that coverage; significantly expand eligibility for Medicaid; 

substantially reduce the growth of Medicare’s payment rates for most services (relative to 

the growth rates projected under current law); impose an excise tax on insurance plans 

with relatively high premiums; and make various other changes to the federal tax code, 

Medicare, Medicaid, and other programs. 

CBO and JCT estimate that, on balance, the direct spending and revenue effects of 

enacting the Patient Protection and Affordable Care Act incorporating the manager’s 

 

1

 Section 3112 of the Patient Protection and Affordable Care Act would rescind amounts available in the Medicare 

Improvement Fund. H.R. 3326, which was cleared by the Senate on December 19, 2009, would reduce the amount 

in that fund that is available for 2014 by $1.55 billion and increase the amount available for 2015 by $0.55 billion. 

As a result of those changes, the estimated savings for the PPACA as originally proposed and incorporating the 

manager's amendment would be reduced by $1 billion over both the 2010–2014 and 2010–2019 periods. That 

change does not affect the estimated incremental effect of the proposed manager’s amendment. 
Honorable Harry Reid 

Page 2 

amendment would yield a net reduction in federal deficits of $132 billion over the 

2010-2019 period (see Table 1). Approximately $81 billion of that reduction would be 

on-budget; other effects related to Social Security revenues and spending as well as 

spending by the U.S. Postal Service are classified as off-budget. CBO has not completed 

an estimate of the legislation’s potential impact on spending that would be subject to 

future appropriation action. 

This estimate incorporates the effects of the manager’s amendment, which would make a 

number of changes to the Patient Protection and Affordable Care Act as originally 

proposed. The changes with the largest budgetary effects include: expanding eligibility 

for a small business tax credit; increasing penalties on certain uninsured people; replacing 

a “public plan” that would be run by the Department of Health and Human Services 

(HHS) with “multi-state” plans that would be offered under contract with the Office of 

Personnel Management (OPM); deleting provisions that would increase payment rates for 

physicians under Medicare; and increasing the payroll tax on higher-income individuals 

and families. Of the total deficit reduction of $132 billion projected to result from the 

legislation, the manager’s amendment accounts for about $2 billion, and the act as 

originally proposed accounts for the remaining $130 billion. 

CBO and JCT have determined that the legislation contains several intergovernmental 

and private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA). 

The total cost of those mandates to state, local, and tribal governments and the private 

sector would greatly exceed the thresholds established in UMRA ($69 million and 

$139 million, respectively, in 2009, adjusted annually for inflation). 

CBO and JCT’s assessment of the legislation’s impact on the federal budget deficit is 

summarized in Table 1. Table 2 shows federal budgetary cash flows for direct spending 

and revenues associated with the legislation. Table 3 displays the changes in direct 

spending and revenues resulting from the provisions in the manager’s amendment. 

Table 4 provides estimates of the resulting changes in the number of nonelderly people in 

the United States who would have health insurance and presents the primary budgetary 

effects of the legislation’s major provisions related to insurance coverage. Table 5 

displays detailed estimates of the costs or savings from other proposed changes (primarily 

to the Medicare program) that would affect the federal government’s direct spending and 

some aspects of revenues. Detailed estimates of the impact of the tax provisions in 

Title IX of the legislation are provided by JCT in JCX-61-09 (see www.jct.gov). 

This analysis also reviews the main changes included in the manager’s amendment, 

examines the longer-term effects of the legislation on the federal budget, and assesses the 

effects of the manager’s amendment on health insurance premiums. 
Honorable Harry Reid 

Page 3 

Table 1. Estimate of the Effects on the Deficit of the Patient Protection and Affordable 

Care Act, Incorporating the Manager’s Amendment 

 By Fiscal Year, in Billions of Dollars 

 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

 

NET CHANGES IN THE DEFICIT FROM INSURANCE COVERAGE PROVISIONS a,b

 

Effects on the Deficit 2 5 6 3 37 74 109 120 125 133 54 614

 

NET CHANGES IN THE DEFICIT FROM OTHER PROVISIONS AFFECTING DIRECT SPENDING c

 

Effects on the Deficit of 

Changes in Outlays 4 -6 -16 -27 -45 -53 -63 -79 -91 -106 -90 -483

 

NET CHANGES IN THE DEFICIT FROM OTHER PROVISIONS AFFECTING REVENUES d

 

Effects on the Deficit of 

Changes in Revenues -1 -6 -10 -30 -27 -32 -35 -38 -41 -42 -75 -264

NET CHANGES IN THE DEFICIT a

Net Increase or Decrease (-) 

in the Budget Deficit 5 -8 -20 -54 -35 -12 10 3 -7 -16 -111 -132

 On-Budget 5 -7 -19 -49 -34 -8 18 13 4 -3 -105 -81

 Off-Budget e

 * * * -5 -1 -4 -8 -10 -11 -13 -6 -52

 

Memorandum: 

 

Effects on the Deficit of 

PPACA as Originally 

Proposed 

Net Increase or Decrease 2 -14 -28 -58 -38 -11 14 11 1 -8 -136 -130

 On-Budget 2 -14 -28 -54 -36 -7 21 20 12 5 -129 -77

 Off-Budget e

 * * * -4 -3 -4 -8 -10 -11 -13 -6 -52

 

Incremental Effects on the 

Deficit of Incorporating the 

Manager’s Amendment 

Net Increase or Decrease 3 6 8 5 3 -1 -3 -7 -8 -8 25 -2

 On-Budget 3 7 9 5 1 -1 -3 -7 -8 -8 25 -3

 Off-Budget e

 * * -1 -1 2 1 * ****1

 Continued
Honorable Harry Reid 

Page 4 

Table 1. Continued. 

Sources: Congressional Budget Office and staff of the Joint Committee on Taxation (JCT). 

Notes: Positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit. 

 

 Components may not sum to totals because of rounding; * = between 0.5 billion and -0.5 billion. 

 

 PPACA = Patient Protection and Affordable Care Act. 

 

a. Does not include effects on spending subject to future appropriations. 

 

b. Includes excise tax on high-premium insurance plans. 

c. These estimates reflect the effects of provisions affecting Medicare, Medicaid, and other federal health programs, and include 

the effects of interactions between insurance coverage provisions and those programs. 

d. The changes in revenues include effects on Social Security revenues, which are classified as off-budget. The 10-year figure of 

$264 billion includes $250 billion in revenues from tax provisions (estimated by JCT) apart from receipts from the excise tax 

on high-premium insurance plans and $14 billion in revenues from certain provisions affecting Medicare, Medicaid, and other 

programs (estimated by CBO and JCT). (For JCT’s estimates, see JCX-61-09.) 

e. Off-budget effects include changes in Social Security spending and revenues as well as spending by the U.S. Postal Service. 

Estimated Budgetary Impact 

According to CBO and JCT’s assessment, enacting the Patient Protection and Affordable 

Care Act with the manager’s amendment would result in a net reduction in federal budget 

deficits of $132 billion over the 2010–2019 period (see Table 1). In the subsequent 

decade, the collective effect of its provisions would probably be continued reductions in 

federal budget deficits if all of the provisions continued to be fully implemented. Those 

estimates are subject to substantial uncertainty. 

The estimate includes a projected net cost of $614 billion over 10 years for the proposed 

expansions in insurance coverage. That net cost itself reflects a gross total of $871 billion in 

subsidies provided through the exchanges, increased net outlays for Medicaid and the 

Children’s Health Insurance Program (CHIP), and tax credits for small employers; those costs 

are partly offset by $149 billion in revenues from the excise tax on high-premium insurance 

plans and $108 billion in net savings from other sources. Over the 2010–2019 period, the net 

cost of the coverage expansions would be more than offset by the combination of other 

spending changes that CBO estimates would save $483 billion and other provisions that JCT 

and CBO estimate would increase federal revenues by $264 billion.2

In total, CBO and JCT estimate that the legislation would increase outlays by $366 billion 

and increase revenues by $498 billion between 2010 and 2019 (see Table 2). 

 

2

 The 10-year figure of $264 billion includes $250 billion in revenues from tax provisions (estimated by JCT) apart from receipts from 

the excise tax on high-premium insurance plans and $14 billion in revenues from certain provisions affecting Medicare, Medicaid, and 

other programs (estimated by CBO and JCT). (For JCT’s estimates, see JCX-61-09.)
Honorable Harry Reid 

Page 5 

Table 2. Estimated Changes in Direct Spending and Revenues Resulting From the Patient 

Protection and Affordable Care Act, Incorporating the Manager’s Amendment

 By Fiscal Year, in Billions of Dollars 

 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

 

CHANGES IN DIRECT SPENDING (OUTLAYS) 

 

Health Insurance Exchanges 

 Premium and Cost Sharing 

 Subsidies 0 0 0 0 13 31 55 69 76 84 13 329

 Start-up Costs * * * * * * 0 00022

 Other Related Spending 0 1 2 2 1 * * * * 0 5 5

 

 Subtotal * 2 2 2 14 32 55 69 76 84 20 336

 

Reinsurance and Risk 

 Adjustment Payments a

 0 0 0 0 12 19 21 21 22 24 12 120

 

Effects of Coverage Provisions 

on Medicaid and CHIP * -2 -3 -3 28 54 75 79 81 87 20 395

Medicare and Other Medicaid 

and CHIP Provisions 

 Reductions in Annual 

 Updates to Medicare 

 FFS Payment Rates * -2 -5 -9 -13 -18 -24 -31 -38 -46 -28 -186

 Medicare Advantage Rates 

 Based on Plans’ Bids 0 -6 -7 -10 -11 -12 -14 -17 -19 -22 -34 -118

 Medicare and Medicaid 

 DSH Payments 0 0 * * * -6 -8 -9 -9 -10 * -43

 Other 1 2 -1 -3 -15 -10 -10 -14 -18 -22 -17 -91

 

 Subtotal 1 -6 -13 -22 -39 -47 -57 -72 -84 -100 -79 -438

 

Other Changes in Direct 

Spending 

 Community Living 

 Assistance Services and 

 Supports 0 -4 -6 -9 -10 -11 -10 -9 -8 -7 -29 -72

 Other 4 4 4 4 4 4 2 * * -1 20 26

 

 Subtotal 4 1 -2 -5 -6 -7 -7 -8 -8 -7 -9 -47

 

Total Outlays 5 -6 -16 -27 8 51 87 88 87 87 -35 366

 On-budget 5 -6 -16 -27 8 51 87 88 86 86 -36 362

 Off-budget 0*****1 111*4

Continued
Honorable Harry Reid 

Page 6 

Table 2. Continued. 

 By Fiscal Year, in Billions of Dollars 

 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

CHANGES IN REVENUES 

 

Coverage-Related Provisions 

 Exchange Premium Credits 0 0 0 0 -4 -9 -17 -22 -24 -26 -4 -102

 Reinsurance and Risk 

 Adjustment Collections 0 0 0 0 13 18 21 21 23 25 13 121

 Small Employer Tax Credit -2 -4 -5 -6 -5 -3 -3 -3 -4 -4 -21 -38

 Penalty Payments by 

 Employers and Uninsured 

 Individuals 000025 7 9 10 10 2 43

 Excise Tax on High- 

 Premium Plans 0 0 0 7 13 17 22 26 30 35 20 149

 Associated Effects of 

 Coverage Provisions on 

 Revenues * * -1 -5 -3 3 12 16 18 20 -9 61

 

Other Provisions 

 Fees on Certain 

 Manufacturers and 

 Insurers b

 2 6 8 10 12 12 12 13 14 14 37 101

 Additional Hospital 

 Insurance Tax 0 0 0 13 6 10 13 14 15 15 19 87

 Other Revenue Provisions c

 -1 1 2 7 9 10 10 11 13 13 19 76

Total Revenues * 2 4 27 44 63 77 85 94 103 76 498

 On-budget -1 1 4 22 42 59 69 75 82 89 69 443

 Off-budget ***5148 11 12 14 7 55

NET IMPACT ON THE DEFICIT FROM CHANGES IN DIRECT SPENDING AND REVENUES d

Net Change in the Deficit 5 -8 -20 -54 -35 -12 10 3 -7 -16 -111 -132

 On-budget 5 -7 -19 -49 -34 -8 18 13 4 -3 -105 -81

 Off-budget * * * -5 -1 -4 -8 -10 -11 -13 -6 -52

Sources: Congressional Budget Office and the staff of the Joint Committee on Taxation. 

Notes: Does not include effects on spending subject to future appropriation. Components may not sum to totals because of rounding. 

 

 * = between $0.5 billion and -$0.5 billion. 

 

 CHIP = Children’s Health Insurance Program; FFS = Fee-for-service; DSH = Disproportionate Share Hospital. 

a. Risk adjustment payments lag revenues shown later in the table by one quarter. Reinsurance payments total $20 billion over the 10-year 

period. 

 

b. Amounts include fees on manufacturers and importers of branded drugs and certain medical devices as well as fees on health insurance 

providers. 

 

c. Amounts include $62 billion in increased revenues, as estimated by JCT, for tax provisions other than those broken out separately in the 

table. In addition, this line includes an increase in revenues of about $14 billion for other provisions shown in Table 5. 

 

d. Positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit. 
Honorable Harry Reid 

Page 7 

Provisions Regarding Insurance Coverage 

The legislation would take several steps designed to increase the number of legal U.S. 

residents who have health insurance. Starting in 2014, the legislation would establish a 

requirement for such residents to obtain insurance and would in many cases impose a 

financial penalty on people who did not do so. The bill also would establish new 

insurance exchanges and would subsidize the purchase of health insurance through those 

exchanges for individuals and families with income between 133 percent and 400 percent 

of the federal poverty level (FPL). Policies purchased through the exchanges (or directly 

from insurers) would have to meet several requirements: In particular, insurers would 

have to accept all applicants, could not limit coverage for preexisting medical conditions, 

and could not vary premiums to reflect differences in enrollees’ health. The options 

available in the insurance exchanges would include private health insurance plans and 

could include two national or multi-state plans operated under contract with OPM. 

Starting in 2014, most nonelderly people with income below 133 percent of the FPL 

would be made eligible for Medicaid. The federal government would pay all of the costs 

of covering newly eligible enrollees through 2016; in subsequent years, the federal share 

of spending would vary somewhat from year to year but would average about 90 percent 

by 2019. (Under current rules, the federal government usually pays about 57 percent, on 

average, of the costs of Medicaid benefits.) In addition, states would be required to 

maintain current coverage levels for all Medicaid beneficiaries until the exchanges were 

fully operational; coverage levels for children under Medicaid and CHIP would have to 

be maintained through 2019. Beginning in 2014, states would receive higher federal 

reimbursement for CHIP beneficiaries, increasing from an average of 70 percent to 

93 percent. The legislation would also provide states with additional CHIP funding in 

2014 and 2015. 

The legislation contains a number of other key provisions related to insurance coverage. 

In general, firms with more than 50 workers that did not offer coverage would have to 

pay a penalty of $750 for each full-time worker if any of their workers obtained 

subsidized coverage through the insurance exchanges; that dollar amount would be 

indexed. As a rule, full-time workers who were offered coverage from their employer 

would not be eligible to obtain subsidies via the exchanges. However, an exception to 

that “firewall” would be allowed for workers who had to pay more than a specified 

percentage of their income for their employer’s insurance—9.8 percent in 2014, indexed 

over time—in which case the employer would be penalized. Under certain circumstances, 

firms with relatively few employees and relatively low average wages would also be 

eligible for tax credits to cover up to half of their contributions toward health insurance 

premiums. Beginning in 2013, insurance policies with relatively high total premiums 

would be subject to a 40 percent excise tax on the amount by which the premiums 

exceeded a specified threshold. That threshold would be set initially at $8,500 for single 
Honorable Harry Reid 

Page 8 

policies and $23,000 for family policies (with certain exceptions); after 2013, those 

amounts would be indexed to overall inflation plus 1 percentage point. 

Effects of Insurance Coverage Provisions 

CBO and JCT estimate that provisions affecting health insurance coverage would result 

in a net increase in federal deficits of $614 billion over fiscal years 2010 through 2019 

(see Table 4). That estimate includes $395 billion in additional net federal outlays for 

Medicaid and CHIP.3

 It also includes $436 billion in federal subsidies that would be 

provided to purchase coverage through the new insurance exchanges and related 

spending.4

 The other main element of the coverage provisions that would increase federal 

deficits is the tax credit for certain small employers who offer health insurance, which is 

estimated to cost $40 billion over 10 years. Those costs would be partly offset by receipts 

or savings, totaling $257 billion over the 10-year budget window, from four sources: net 

revenues from the excise tax on high-premium insurance plans, totaling $149 billion; 

penalty payments by uninsured individuals, which would amount to $15 billion; penalty 

payments by employers whose workers received subsidies via the exchanges, which 

would total $28 billion; and other budgetary effects, mostly on tax revenues, associated 

with the expansion of federally subsidized insurance, which would reduce deficits by 

$65 billion.5

 

By 2019, CBO and JCT estimate, the number of nonelderly people who are uninsured 

would be reduced by about 31 million, leaving about 23 million nonelderly residents 

uninsured (about one-third of whom would be unauthorized immigrants). Under the 

legislation, the share of legal nonelderly residents with insurance coverage would rise 

from about 83 percent currently to about 94 percent. Approximately 26 million people 

would purchase their own coverage through the new insurance exchanges, and there 

would be roughly 15 million more enrollees in Medicaid and CHIP than is projected 

under current law. Relative to currently projected levels, the number of people purchasing 

individual coverage outside the exchanges would decline by about 5 million. Under the 

legislation, certain employers could allow all of their workers to choose among the plans 

available in the exchanges, but those enrollees would not be eligible to receive subsidies 

via the exchanges (and thus are shown in Table 4 as enrollees in employment-based 

 

3

 CBO estimates that state spending on Medicaid and CHIP would increase by about $26 billion over the 2010–2019 

period as a result of the provisions affecting coverage reflected in Table 4. That estimate reflects states’ flexibility to 

make programmatic and other budgetary changes to Medicaid and CHIP. 

4

 Related spending includes the administrative costs of establishing the exchanges as well as $5 billion for high-risk 

pools and the net budgetary effects of proposed payments and receipts for reinsurance and risk adjustment. 

5

 Changes in the extent of employment-based health insurance affect federal revenues because most payments for 

that coverage are tax-preferred. If employers increase or decrease the amount of compensation they provide in the 

form of health insurance (relative to current-law projections), CBO and JCT assume that offsetting changes will 

occur in wages and other forms of compensation—which are generally taxable—to hold total compensation roughly 

the same. Such effects also arise with respect to specific elements of the proposal (such as the tax credits for small 

employers), and those effects are included within the estimates for those elements. 
Honorable Harry Reid 

Page 9 

coverage rather than as exchange enrollees). Approximately 5 million people would 

obtain coverage in that way in 2019, bringing the total number of people enrolled in 

exchange plans to about 30 million in that year. 

The number of people obtaining coverage through their employer would be about 

4 million lower in 2019 under the legislation, CBO and JCT estimate. The net change in 

employment-based coverage is the result of several flows, which can be illustrated using 

the estimates for 2019: 

• About 6 million people would be covered by an employment-based plan under the 

proposal who would not be covered by one under current law (largely because the 

mandate for individuals to be insured would increase workers’ demand for 

coverage through their employers). 

• Between 8 million and 9 million other people who would be covered by an 

employment-based plan under current law would not have an offer of such 

coverage under the proposal. Firms that would choose not to offer coverage as a 

result of the proposal would tend to be smaller employers and employers that 

predominantly employ lower-wage workers—people who would be eligible for 

subsidies through the exchanges—although some workers who would not have 

employment-based coverage because of the proposal would not be eligible for 

such subsidies. Whether those changes in coverage would represent the dropping 

of existing coverage or a lack of new offers of coverage is difficult to determine. 

• In addition, between 1 million and 2 million people who could be covered by their 

employer’s plan (or a plan offered to a family member) would instead obtain 

coverage in the exchanges, either because the employer’s offer would be deemed 

unaffordable and they would therefore be eligible to receive subsidies in the 

exchanges, or because the “firewall” for those with an offer of employer coverage 

would be imperfectly enforced. (Those people are counted as enrollees in the 

exchanges.) 

The proposal would call on OPM to contract for two national or multi-state health 

insurance plans—one of which would have to be nonprofit—that would be offered 

through the insurance exchanges. Whether insurers would be interested in offering such 

plans is unclear, and establishing a nationwide plan comprising only nonprofit insurers 

might be particularly difficult. Even if such plans were arranged, the insurers offering 

them would probably have participated in the insurance exchanges anyway, so the 

inclusion of this provision did not have a significant effect on the estimates of federal 

costs or enrollment in the exchanges. 
Honorable Harry Reid 

Page 10 

Provisions Affecting Medicare, Medicaid, and Other Programs

Other components of the legislation would alter spending under Medicare, Medicaid, and 

other federal programs. The legislation would make numerous changes to payment rates 

and payment rules in those programs (the budgetary effects of which are summarized in 

Table 1 and detailed in Table 5). In total, CBO estimates that enacting those provisions 

would reduce net direct spending by $483 billion over the 2010–2019 period.6

 The 

provisions that would result in the largest budget savings include these: 

• Permanent reductions in the annual updates to Medicare’s payment rates for most 

services in the fee-for-service sector (other than physicians’ services), yielding 

budgetary savings of $186 billion over 10 years. (That calculation excludes 

interactions between those provisions and others—namely, the effects of those 

changes on payments to Medicare Advantage plans and collections of Part B 

premiums.) 

• Setting payment rates in the Medicare Advantage program on the basis of the 

average of the bids submitted by Medicare Advantage plans in each market, 

yielding savings of an estimated $118 billion (before interactions) over the 2010–

2019 period. 

• Reducing Medicaid and Medicare payments to hospitals that serve a large number 

of low-income patients, known as disproportionate share hospitals (DSH), by 

about $43 billion—composed of roughly $19 billion from Medicaid and 

$24 billion from Medicare DSH payments. 

The legislation also would establish an Independent Payment Advisory Board, which 

would be required, under certain circumstances, to recommend changes to the Medicare 

program to limit the rate of growth in that program’s spending. Those recommendations 

would go into effect automatically unless blocked by subsequent legislative action. Such 

recommendations would be required if the Chief Actuary for the Medicare program 

projected that the program’s spending per beneficiary would grow more rapidly than a 

measure of inflation (the average of the growth rates of the consumer price index for 

medical services and the overall index for all urban consumers). The provision would 

place a number of limitations on the actions available to the board, including a 

prohibition against modifying eligibility or benefits, so its recommendations probably 

would focus on: 

• Reductions in subsidies for non-Medicare benefits offered by Medicare 

Advantage plans; and 

 

6

 In addition, the effects of certain provisions affecting Medicare, Medicaid, and other programs would increase 

federal revenues by approximately $14 billion over the 2010–2019 period. 
Honorable Harry Reid 

Page 11 

• Changes to payment rates or methodologies for services furnished in the fee-forservice sector by providers other than hospitals, physicians, hospices, and 

suppliers of durable medical equipment that is offered through competitive 

bidding.7

The board would develop its first set of recommendations during 2013 for 

implementation in 2015. CBO expects that the board would be fairly effective at meeting 

the savings targets during the 2015–2019 period. As a result, CBO estimates that—given 

all of the reductions that would result from other provisions—this arrangement would 

reduce Medicare spending by an additional $28 billion over that period. That estimate 

represents the expected value of the 10-year savings from the arrangement, reflecting 

CBO’s judgment that most, but not all, of the targeted savings would be achieved through 

this process. The board would also be required to make recommendations regarding 

changes to nonfederal health care programs that would slow the growth of national health 

expenditures. Those recommendations would be non-binding. 

The legislation includes a number of other provisions with a significant budgetary effect. 

They include the following: 

• Community Living Assistance Services and Supports (CLASS) provisions, which 

would establish a voluntary federal program for long-term care insurance. Active 

workers could purchase coverage, usually through their employer. Premiums 

would be set to cover the full cost of the program as measured on an actuarial 

basis. However, the program’s cash flows would show net receipts for a number of 

years, followed by net outlays in subsequent decades. In particular, the program 

would pay out far less in benefits than it would receive in premiums over the 

10-year budget window, reducing deficits by about $72 billion over that period, 

including about $2 billion in savings to Medicaid. 

• Requirements that the Secretary of HHS adopt and regularly update standards for 

electronic administrative transactions that enable electronic funds transfers, claims 

management processes, and verification of eligibility, among other administrative 

tasks. These provisions would result in about $11 billion in federal savings in 

Medicaid and reduced subsidies paid through the insurance exchanges. In addition, 

these standards would result in an increase in revenues of about $8 billion as an 

indirect effect of reducing the cost of private health insurance plans. 

 

7

 The proposal would authorize the board to recommend changes that would affect hospitals and hospices beginning 

in 2020. 
Honorable Harry Reid 

Page 12 

• A mandatory appropriation of $15 billion to establish a Prevention and Public 

Health Fund. CBO estimates that outlays of those funds would total about 

$13 billion over the 2010–2019 period. 

• Mandatory funding of $10 billion for community health centers and the National 

Health Service Corps. CBO estimates that outlays of those funds would total about 

$10 billion over the 2010–2019 period. 

• An abbreviated approval pathway for biosimilar biological products (biological 

products that are highly similar to or interchangeable with their brand-name 

counterparts), which would reduce direct spending by an estimated $7 billion over 

the 2010–2019 period. 

Effect of the Legislation on Discretionary Costs 

CBO has not completed an estimate of the discretionary costs that would be associated 

with the legislation. Such costs would include those arising from the effects of the 

legislation on a variety of federal programs and agencies as well as from a number of new 

and existing programs subject to future appropriations. 

The federal agencies that would be responsible for implementing the provisions of the 

legislation are funded through the appropriation process; sufficient appropriations would 

be essential for them to implement this legislation in the time frame it specifies. Major 

costs for programs subject to future appropriations would include these: 

• Costs to the Internal Revenue Service of implementing the eligibility 

determination, documentation, and verification processes for premium and cost 

sharing credits. Those costs would probably be between $5 billion and $10 billion 

over 10 years. 

• Costs to HHS (especially the Centers for Medicare and Medicaid Services) and 

OPM of implementing the changes in Medicare, Medicaid, and CHIP as well as 

certain reforms to the private insurance market. Those costs would probably be at 

least $5 billion to $10 billion over 10 years. (The administrative costs of 

establishing and operating the exchanges are reflected in Table 1.) 

• Costs of a number of grant programs and other changes in the legislation. CBO 

has not completed a review of those provisions. 

Because those costs depend on future appropriations, they are not counted for 

enforcement of Congressional “pay-as-you-go” procedures and are not included in 

Table 1. 
Honorable Harry Reid 

Page 13 

Changes Made in the Patient Protection and Affordable Care Act by the Manager’s 

Amendment

On November 18, 2009, CBO transmitted an analysis by CBO and JCT of the legislation 

as originally proposed. The estimates provided here differ from the ones in that analysis 

because they incorporate the effects of the manager’s amendment. Relative to the 

provisions included in the PPACA as originally proposed, key examples of the changes 

that would be made by the manager’s amendment are as follows: 

• The tax credit for small businesses would be made available to firms paying 

somewhat higher average wages, and it would first take effect in 2010 rather than 

2011. 

• The penalty for not having insurance would be the greater of a flat dollar amount 

per person or a percentage of the individual’s income, which would increase the 

amount of penalties collected. 

• The provision establishing a public plan that would be run by HHS was replaced 

with a provision for multi-state plans that would be offered under contract with 

OPM. 

• Certain workers would have the option of obtaining tax-free vouchers from their 

employers equal in value to the contributions their employers would make to their 

health insurance plans. The value of vouchers would be adjusted for age, and the 

vouchers would be used in the exchanges to purchase coverage that would 

otherwise be unsubsidized. (CBO and JCT estimate that about 100,000 workers 

would take advantage of that option.) 

• Several provisions regulating insurers were added, including a requirement for an 

insurer to provide rebates if its share of premiums going to administrative costs 

exceeds specified levels and a general prohibition on imposing annual limits on 

the amount of benefits that would be covered. 

• Additional federal funding for CHIP would be provided to states in 2014 and 

2015. 

• A provision that would increase Medicare’s payment rates for physicians’ services 

by 0.5 percent for 2010 was eliminated. Instead, the 21 percent reduction in those 

payment rates that is scheduled to occur in 2010 under current law would take 

effect. 
Honorable Harry Reid 

Page 14 

• The measure of Medicare spending that would be used to set savings targets for 

the Independent Payment Advisory Board was modified. 

• The increment to the Hospital Insurance portion of the payroll tax rate for 

individuals with income above $200,000 and for families with income above 

$250,000 was raised from 0.5 percent to 0.9 percent. 

• The 5 percent excise tax on cosmetic surgery was eliminated, and a 10 percent 

excise tax on indoor tanning services was added. 

• Community health centers and the National Health Service Corps would receive 

an additional $10 billion in mandatory funding. 

• Revisions to and extensions of the Indian Health Care Improvement Act were 

added. 

Table 3. Estimate of the Incremental Effects on the Deficit of Incorporating the Manager’s 

Amendment to the Patient Protection and Affordable Care Act, as Originally Proposed 

 By Fiscal Year, in Billions of Dollars 

 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

 

CHANGES IN DIRECT SPENDING 

 

Change in Outlays -7 -1 4 3 4 6 4 -1 -1 -2 3 10

 On-Budget -7 -1 4 3 4 6 4 -1 -1 -2 3 10

 Off-Budget 0 0 * * * * * *****

 

CHANGES IN REVENUES 

 

Change in Revenues -9 -8 -4 -1 1 7 7 7 7 6 -22 12

 On-Budget -10 -8 -5 -2 3 8 7 7 7 6 -22 13

 Off-Budget * * 1 1 -2 -1 * * * * * -1

 

NET IMPACT ON THE DEFICIT FROM CHANGES IN DIRECT SPENDING AND REVENUES a

 

Net Change in the Deficit 3 6 8 5 3 -1 -3 -7 -8 -8 25 -2

 On-Budget 3 7 9 5 1 -1 -3 -7 -8 -8 25 -3

 Off-Budget * * -1 -1 2 1 * ****1

Sources: Congressional Budget Office and the staff of the Joint Committee on Taxation. 

Notes: Does not include effects on spending subject to future appropriation. Components may not sum to totals because of rounding. 

 

 * = between $0.5 billion and -$0.5 billion. 

a. Positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit. 
Honorable Harry Reid 

Page 15 

Relative to the savings projected for the original proposal, the manager’s amendment 

would reduce the deficit by another $2 billion over 10 years (see Table 3). During this 

period, the amendment would increase direct spending by about $10 billion and increase 

revenues by about $12 billion. 

The increase in funding for CHIP would raise enrollment and spending in CHIP for 

several years, with partially offsetting reductions in other sources of coverage. Expanding 

the small business tax credit would increase the gross cost of the coverage expansion by 

about $13 billion. Increasing the penalty for not having insurance would increase penalty 

collections by about $7 billion on net. Several other provisions of the manager’s 

amendment also would affect enrollment and spending in Medicaid, CHIP, and the 

exchanges. By 2019, the changes related to insurance coverage would slightly increase 

enrollment in employment-based plans and the exchanges, and they would slightly reduce 

the number of uninsured people and the number of people enrolled in Medicaid. CBO 

and JCT estimate that the gross cost of the proposed expansions in insurance coverage 

would be roughly $23 billion higher as a result of the manager’s amendment than they 

would be under the act as originally proposed ($871 billion compared with $848 billion). 

The net cost of the proposed insurance expansions would be about $15 billion higher than 

under the PPACA as originally proposed. 

Other provisions included in the manager’s amendment would increase federal revenues 

by about $26 billion (mostly from the change in the payroll tax) and would reduce the 

savings in Medicare, Medicaid, and other direct spending by about $8 billion on net. 

Effects of the Legislation Beyond the First 10 Years 

Although CBO does not generally provide cost estimates beyond the 10-year budget 

projection period (2010 through 2019 currently), Senate rules require some information 

about the budgetary impact of legislation in subsequent decades, and many Members 

have requested CBO analyses of the long-term budgetary impact of broad changes in the 

nation’s health care and health insurance systems. A detailed year-by-year projection for 

years beyond 2019, like those that CBO prepares for the 10-year budget window, would 

not be meaningful because the uncertainties involved are simply too great. Among other 

factors, 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 (such as advances 

in medical research, technological developments, and changes in physicians’ practice 

patterns)—that are likely to be significant but are very difficult to predict, both under 

current law and under any proposal. 

Effects on the Deficit. CBO has developed a rough outlook for the decade following the 

10-year budget window by grouping the elements of the legislation into broad categories 

and assessing the rate at which the budgetary impact of each of those broad categories is 

likely to increase over time. The categories are as follows: 
Honorable Harry Reid 

Page 16 

• The gross cost of the coverage expansions, consisting of exchange subsidies, the net 

costs of expanded eligibility for Medicaid, and tax credits for employers: Those 

provisions have an estimated cost of $199 billion in 2019, and that cost is growing 

at about 8 percent per year toward the end of the 10-year budget window. As a 

rough approximation, CBO assumes continued growth at about that rate during the 

following decade. 

• The excise tax on high-premium insurance plans: JCT estimates that the provision 

would generate about $35 billion in additional revenues in 2019 and expects that 

receipts would grow by roughly 10 percent to 15 percent per year in the following 

decade. 

• Other taxes and other effects of coverage provisions on revenues: Increased 

revenues from those provisions are estimated to total $74 billion in 2019 and are 

growing at about 7 percent per year toward the end of the budget window. As a 

rough approximation, CBO assumes continued growth at about that rate during the 

following decade. 

• Changes to the Medicare program and changes to Medicaid and CHIP other than 

those associated directly with expanded insurance coverage: Savings from those 

provisions are estimated to total $106 billion in 2019, and CBO expects that, in 

combination, they would increase by nearly 15 percent per year in the next decade. 

All told, the legislation incorporating the manager’s amendment would reduce the federal 

deficit by $16 billion in 2019, CBO and JCT estimate. In the decade after 2019, the gross 

cost of the coverage expansion would probably exceed 1 percent of gross domestic 

product (GDP), but the added revenues and cost savings would probably be greater. 

Consequently, CBO expects that the legislation, if enacted, would reduce federal budget 

deficits over the ensuing decade relative to those projected under current law—with a 

total effect during that decade that is in a broad range around one-half percent of GDP. 

The imprecision of that calculation reflects the even greater degree of uncertainty that 

attends to it, compared with CBO’s 10-year budget estimates. The expected reduction in 

deficits would represent a small share of the total deficits that would be likely to arise in 

that decade under current policies.8

Relative to the legislation as originally proposed, the expected reduction in deficits 

during the 2020–2029 period is larger for the legislation incorporating the manager’s 

amendment. Most of that difference 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. Such 

 

8

 See Congressional Budget Office, The Long-Term Budget Outlook (June 2009). 
Honorable Harry Reid 

Page 17 

recommendations would be required, in the legislation as originally proposed, if 

projected growth in Medicare spending per beneficiary exceeded the rate of increase in 

national health expenditures per capita—and in the legislation incorporating the 

manager’s amendment, if it exceeded the average of the growth rates of the consumer 

price index for medical services and the overall index for all urban consumers. Because 

other elements of the proposal would sharply reduce the growth rate of Medicare 

spending in the next two decades relative to growth in the past two decades—from 

roughly 4 percent to roughly 2 percent on an inflation-adjusted per-beneficiary basis—

CBO expects that the full amount of targeted savings would become more difficult to 

achieve over time. Even so, this element of the manager’s amendment would probably 

augment the reduction in Medicare spending under the proposal significantly in the 

decade beyond the 10-year budget window.

As noted earlier, the CLASS program included in the bill would generate net receipts for 

the government in the initial years when total premiums would exceed total benefit 

payments, but it would eventually lead to net outlays when benefits exceed premiums. As 

a result, the program would reduce deficits by $72 billion during the 10-year budget 

window and would reduce them by a smaller amount in the ensuing decade (an amount 

that is included in the calculations described in the preceding paragraphs). In the decade 

following 2029, the CLASS program would begin to increase budget deficits. However, 

the magnitude of the increase would be fairly small compared with the effects of the 

bill’s other provisions, so the CLASS program does not substantially alter CBO’s 

assessment of the longer-term effects of the legislation.

CBO has not extrapolated estimates further into the future, because the uncertainties 

surrounding them are magnified even more. However, in view of the projected net 

savings during the decade following the 10-year budget window, CBO anticipates that 

the legislation would probably continue to reduce budget deficits relative to those under 

current law in subsequent decades, assuming that all of its provisions would continue to 

be fully implemented. Pursuant to section 311 of S. Con. Res. 70, CBO estimates that 

enacting the legislation would not cause a net increase in deficits in excess of $5 billion 

in any of the four 10-year periods beginning after 2019.

Other Measures. Many Members have expressed interest in the effects of reform 

proposals on various other measures of spending on health care. One such measure is the 

“federal budgetary commitment to health care,” a term that CBO uses to describe the sum 

of net federal outlays for health programs and tax preferences for health care—providing 

a broad measure of the resources committed by the federal government that includes both 

its spending for health care and the subsidies for health care that are conveyed through 

reductions in federal taxes (for example, through the exclusion of payments for 

employment-based health insurance from income and payroll taxes).9

 

9

 For additional discussion of this term, see Congressional Budget Office, letter to the Honorable Max Baucus 

regarding different measures for analyzing current proposals to reform health care (October 30, 2009). 
Honorable Harry Reid 

Page 18 

Under the legislation, federal outlays for health care would increase during the 2010–

2019 period, as would the federal budgetary commitment to health care. The net increase 

in that commitment would be about $200 billion over that 10-year period, driven 

primarily by the gross cost of the coverage expansions (including increases in both 

outlays and tax credits). That cost would be partly offset by reductions in the federal 

commitment from changes to net spending for Medicare, Medicaid, CHIP, and other 

federal health programs; revenues generated by the excise tax on high-premium insurance 

plans; and changes to existing law regarding tax preferences for health care and effects of 

other provisions on tax expenditures for health care. Under the legislation as originally 

proposed, the net increase in the federal budgetary commitment to health care during the 

next 10 years was estimated to be about $160 billion. The difference between those 

figures largely reflects the difference in the gross cost of the coverage expansions. 

In subsequent years, 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. 

Members have also requested information about the effect of proposals on national health 

expenditures (NHE). CBO does not analyze NHE as closely as it does the federal budget, 

however, and at this point the agency has not assessed the net effect of the current 

legislation on NHE, either within the 10-year budget window or for the subsequent 

decade. 

Key Considerations. These longer-term calculations assume that the provisions are 

enacted and remain unchanged throughout the next two decades, which is often not the 

case for major legislation. For example, the sustainable growth rate (SGR) mechanism 

governing Medicare’s payments to physicians has frequently been modified (either 

through legislation or administrative action) to avoid reductions in those payments, and 

legislation to do so again is currently under consideration in the Congress. 

The legislation would maintain and put into effect a number of procedures that might be 

difficult to sustain over a long period of time. Under current law and under the proposal, 

payment rates for physicians’ services in Medicare would be reduced by about 21 percent 

in 2010 and then decline further in subsequent years. At the same time, the legislation 

includes a number of provisions that would constrain payment rates for other providers of 
Honorable Harry Reid 

Page 19 

Medicare services. In particular, increases in payment rates for many providers would be 

held below the rate of inflation (in expectation of ongoing productivity improvements in 

the delivery of health care). The projected longer-term savings for the legislation also 

assume that the Independent Payment Advisory Board is fairly effective in reducing costs 

beyond the reductions that would be achieved by other aspects of the legislation. 

Based on the extrapolation described above, CBO expects that Medicare spending under 

the legislation would increase at an average annual rate of roughly 6 percent during the 

next two decades—well below the roughly 8 percent annual growth rate of the past two 

decades (excluding the effect of establishing the Medicare prescription drug benefit). 

Adjusting for inflation, Medicare spending per beneficiary under the legislation would 

increase at an average annual rate of less than 2 percent during the next two decades—

about half of the roughly 4 percent annual growth rate of the past two decades. It is 

unclear whether such a reduction in the growth rate could be achieved, and if so, whether 

it would be accomplished through greater efficiencies in the delivery of health care or 

would reduce access to care or diminish the quality of care. 

The long-term budgetary impact could be quite different if key provisions of the 

legislation were ultimately changed or not fully implemented. If those changes arose 

from future legislation, CBO would estimate their costs when that legislation was being 

considered by the Congress. 

Effects on Health Insurance Premiums 

On November 30, CBO released an analysis prepared by CBO and JCT of the expected 

impact on average premiums for health insurance in different markets of the legislation as 

originally proposed.10 Although CBO and JCT have not updated the estimates provided 

in that letter, the effects on premiums of the legislation incorporating the manager’s 

amendment would probably be quite similar. Replacing the provisions for a public plan 

run by HHS with provisions for a multi-state plan under contract with OPM is unlikely to 

have much effect on average insurance premiums because the existence of that public 

plan would not substantially change the average premiums that would be paid in the 

exchanges.11 The provisions contained in the manager’s amendment to regulate the share 

of premiums devoted to administrative costs would tend to lower premiums slightly, and 

the provisions prohibiting the imposition of annual limits on coverage would tend to raise 

premiums slightly. 

 

10 For further description, see Congressional Budget Office, letter to the Honorable Evan Bayh providing an analysis 

of health insurance premiums under the Patient Protection and Affordable Care Act (November 30, 2009). 

11 The presence of the public plan had a more noticeable effect on CBO’s estimates of federal subsidies because it 

was expected to exert some downward pressure on the premiums of the lower-cost plans to which those subsidies 

would be tied. 
Honorable Harry Reid 

Page 20 

Private-Sector and Intergovernmental Impact 

CBO and JCT have determined that the legislation contains private-sector and 

intergovernmental mandates as defined in the Unfunded Mandates Reform Act. 

The total cost of mandates imposed on the private sector, as estimated by CBO and JCT, 

would greatly exceed the threshold established in UMRA for private entities 

($139 million in 2009, adjusted annually for inflation)—as was the case for the 

legislation as originally proposed. The most costly mandates would be the new 

requirements regarding health insurance coverage that apply to the private sector. The 

legislation would require individuals to obtain acceptable health insurance coverage, as 

defined in the legislation. The legislation also would penalize medium-sized and large 

employers that did not offer health insurance to their employees if any of their workers 

obtained subsidized coverage through the insurance exchanges. The legislation would 

impose a number of mandates, including requirements on issuers of health insurance, new 

standards governing health information, and nutrition labeling requirements. 

CBO estimates that the total cost of intergovernmental mandates would greatly exceed 

the annual threshold established in UMRA for state, local, and tribal entities ($69 million 

in 2009, adjusted annually for inflation)—as was the case for the legislation as originally 

proposed. The provisions of the legislation that would penalize those entities—if they did 

not offer health insurance to their employees and any of their workers obtained 

subsidized coverage through the insurance exchanges—account for most of the mandate 

costs. In addition, the legislation would preempt state and local laws that conflict with or 

are in addition to new federal standards established by the legislation. Those preemptions 

would limit the application of state and local laws, but CBO estimates that they would not 

impose significant costs. 

As conditions of federal assistance (and thus not mandates as defined in UMRA), the 

legislation would require state and local governments to comply with “maintenance of 

effort” provisions associated with high-risk insurance pools. New requirements in the 

Medicaid program also would result in an increase in state spending. However, because 

states have significant flexibility to make programmatic adjustments in their Medicaid 

programs to accommodate changes, the new requirements would not be 

intergovernmental mandates as defined in UMRA. 
Honorable Harry Reid 

Page 21 

I hope this analysis is helpful for the Senate’s deliberations. If you have any questions, 

please contact me or CBO staff. The primary staff contacts for this analysis are Philip 

Ellis and Holly Harvey. 

Sincerely, 

Douglas W. Elmendorf 

Director 

Enclosures 

cc: Honorable Mitch McConnell 

 Republican Leader 

 Honorable Max Baucus 

 Chairman 

 Committee on Finance 

 Honorable Chuck Grassley 

 Ranking Member 

 Honorable Tom Harkin 

 Chairman 

 Committee on Health, Education, Labor, and Pensions 

 Honorable Michael B. Enzi 

 Ranking Member 

 Honorable Kent Conrad 

 Chairman 

 Committee on the Budget 

 Honorable Judd Gregg 

 Ranking Member 
EFFECTS ON INSURANCE COVERAGE /a 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

(Millions of nonelderly people, by calendar year)

 Current Law Medicaid & CHIP 40 39 39 38 35 34 35 35 35 35

 Coverage /b Employer 150 153 156 158 161 162 162 162 162 162

Nongroup & Other /c 27 26 25 26 28 29 29 29 30 30

Uninsured /d 50 51 51 51 51 51 52 53 53 54

TOTAL 267 269 271 273 274 276 277 279 281 282

 Change (+/-) Medicaid & CHIP * -1 -2 -2 8 13 16 15 15 15

Employer * 2 2 2 2 -1 -4 -4 -4 -4

Nongroup & Other /c * * * * -2 -3 -5 -5 -5 -5

Exchanges 0 0 0 0 8 14 23 24 25 26

Uninsured /d * -1 -1 -1 -16 -23 -29 -30 -30 -31

Post-Policy Uninsured Population

 Number of Nonelderly People /d 50 50 50 49 34 28 22 22 23 23

 Insured Share of the Nonelderly Population /a

 Including All Residents 81% 81% 82% 82% 88% 90% 92% 92% 92% 92%

 Excluding Unauthorized Immigrants 83% 83% 83% 84% 90% 92% 94% 94% 94% 94%

Memo: Exchange Enrollees and Subsidies

 Number w/ Unaffordable Offer from Employer /e * 1 1 1 1 1

 Number of Unsubsidized Exchange Enrollees 2 3 5 5 6 6

 Average Exchange Subsidy per Subsidized Enrollee $4,700 $4,800 $5,000 $5,300 $5,600

Sources: Congressional Budget Office and the staff of the Joint Committee on Taxation. 

Note: CHIP = Children's Health Insurance Program; * = fewer than 0.5 million people. 

a. Figures for the nonelderly population include only residents of the 50 states and the District of Columbia. 

b. Figures reflect average annual enrollment; individuals reporting multiple sources of coverage are assigned a primary source. 

c. Other, which includes Medicare, accounts for about half of current-law coverage in this category; the effects of the proposal are almost entirely on nongroup coverage. 12/19/2009

d. The count of uninsured people includes unauthorized immigrants as well as people who are eligible for, but not enrolled in, Medicaid. Page 1 of 2

e. Workers who would have to pay more than a specified share of their income (9.8 percent in 2014) for employment-based coverage could receive subsidies via an exchange. 

TABLE 4. Estimated Effects of the Insurance Coverage Provisions Contained in the Patient Protection and Affordable Care 

Act as Proposed, Incorporating the Manager's Amendment 
EFFECTS ON THE FEDERAL DEFICIT / a,b 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2010-2019

(Billions of dollars, by fiscal year)

 Medicaid & CHIP Outlays /c 0 -2 -3 -3 28 54 75 79 81 87 395

 Exchange Subsidies & Related Spending /d 0 2 2 2 17 42 73 90 100 109 436

 Small Employer Tax Credits /e 2 4 5 6 5 4 3 3 4 4 40

 Gross Cost of Coverage Provisions 2 4 5 6 50 99 151 172 184 199 871

 Penalty Payments by Uninsured Individuals 0 0 0 0 0 -1 -2 -4 -4 -4 -15

 Penalty Payments by Employers /e 0 0 0 0 -2 -4 -5 -5 -6 -6 -28

 Excise Tax on High-Premium Insurance Plans /e 0 0 0 -7 -13 -17 -22 -26 -30 -35 -149

 Other Effects on Tax Revenues and Outlays /f 0 1 1 5 2 -3 -13 -17 -19 -22 -65

 NET COST OF COVERAGE PROVISIONS 2 5 6 3 37 74 109 120 125 133 614

Sources: Congressional Budget Office and the staff of the Joint Committee on Taxation. 

Note: CHIP = Children's Health Insurance Program. 

a. Does not include several billion dollars in federal administrative costs that would be subject to appropriation. 

b. Components may not sum to totals because of rounding; positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit. 

e. The effects on the deficit of this provision include the associated effects of changes in taxable compensation on tax revenues. 12/19/2009

f. The effects are almost entirely on tax revenues. CBO estimates that outlays for Social Security benefits would increase by about $3 billion over the 2010-2019 period, Page 2 of 2

and that the coverage provisions would have negligible effects on outlays for other federal programs. 

c. Under current law, states have the flexibility to make programmatic and other budgetary changes to Medicaid and CHIP. CBO estimates that state spending on 

Medicaid and CHIP in the 2010-2019 period would increase by about $26 billion as a result of the coverage provisions. 

d. Includes $5 billion in spending for high-risk pools and the net budgetary effects of proposed collections and payments for reinsurance and risk adjustment. 

TABLE 4. Estimated Effects of the Insurance Coverage Provisions Contained in the Patient Protection and Affordable Care 

Act as Proposed, Incorporating the Manager's Amendment 
Table 5. Estimate of Effects on Direct Spending and Revenues for Non-Coverage Provisions 

of the Patient Protection and Affordable Care Act, Incorporating the Manager's Amendment

By fiscal year, in billions of dollars. 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Changes in Direct Spending Outlays

TITLE I—QUALITY, AFFORDABLE HEALTH CARE FOR ALL AMERICANS

Subtitle A—Immediate Improvements in Health Care Coverage for All Americans

 1001 Amendments to the Public Health Service Act Included in estimate for expanding health insurance coverage.

 1002 Helping Consumers Receive Quality Accountable Coverage * * * 0 0 0 0 0 0 0 * *

Subtitle B—Immediate Assistance to Preserve and Expand Coverage

 1101 Temporary High Risk Health Insurance Pool Included in estimate for expanding health insurance coverage.

 1102 Reinsurance for Early Retirees 3.0 2.0 0 0 0 0 0 0 0 0 5.0 5.0

 1103 Immediate Assistance to Consumers in Identifying 

Affordable Coverage Options Included in estimate for expanding health insurance coverage.

 1104 Administrative Simplification

Effects on Medicaid spending * * -0.1 -0.1 -0.2 -0.4 -0.8 -1.7 -1.8 -2.0 -0.4 -7.1

Effects on exchange subsidies 0 0 0 0 -0.1 -0.3 -0.6 -1.0 -1.2 -1.2 -0.1 -4.3

Subtitle C—Effective Coverage for All Americans Included in estimate for expanding health insurance coverage.

Subtitle D—Available Coverage for All Americans Included in estimate for expanding health insurance coverage.

Subtitle E—Affordable Coverage for All Americans Included in estimate for expanding health insurance coverage.

Subtitle F—Shared Responsibility for Health Care Included in estimate for expanding health insurance coverage.

Subtitle G—Miscellaneous Provisions

 1556 Equity for Certain Eligible Survivors * * * * * * * * * * * *

Sections 1551-1555 and 1557-1562 Included in estimate for expanding health insurance coverage.

Congressional Budget Office Page 1 of 15 12/19/2009
Table 5. Estimate of Effects on Direct Spending and Revenues for Non-Coverage Provisions 

of the Patient Protection and Affordable Care Act, Incorporating the Manager's Amendment

By fiscal year, in billions of dollars. 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

TITLE II—ROLE OF PUBLIC PROGRAMS

Subtitle A—Improved Access to Medicaid

 2001 Medicaid Coverage for the Lowest Income Populations Included in estimate for expanding health insurance coverage.

 2002 Income Eligibility for Nonelderly Determined Using 

Modified Gross Income Included in estimate for expanding health insurance coverage.

 2003 Requirement to Offer Premium Assistance for 

Employer-Sponsored Insurance Included in estimate for expanding health insurance coverage.

2004 Medicaid Coverage for Former Foster Care Children Included in estimate for expanding health insurance coverage.

2005 Payments to Territories 0 0.1 0.1 0.1 0.7 0.7 0.8 0.8 0.9 1.0 1.0 5.3

2006 Special Adjustment to FMAP Determination for 

Certain States Recovering from a Major Disaster 0 0.1 0 0 0 0 0 0 0 0 0.1 0.1

2007 Medicaid Improvement Fund Rescission 0 0 0 0 -0.1 -0.2 -0.2 -0.2 -0.2 0 -0.1 -0.7

Subtitle B—Enhanced Support for the Children’s Health Insurance Program

 2101 Additional Federal Financial Participation for CHIP Included in estimate for expanding health insurance coverage.

 2102 Technical Corrections 0 0 0 0 0.1 * * 0 0 0 0.1 0.1

Subtitle C—Medicaid and CHIP Enrollment Simplification Included in estimate for expanding health insurance coverage.

Subtitle D—Improvements to Medicaid Services

 2301 Coverage for Freestanding Birth Center Services * * * * * * * * * * * *

 2302 Concurrent Care for Children * * * * * * * * * * 0.1 0.2

2303 State Eligibility Option for Family Planning Services 0 0 0 0 0 0 0 0 0 0 0 0

2304 Clarification of Definition of Medical Assistance 0 0 0 0 0 0 0 0 0 0 0 0

Subtitle E—New Options for States to Provide Long-Term Services and Supports

 2401 Community First Choice Option 0 0.1 0.2 0.3 0.7 0.8 0.9 1.1 1.2 1.5 1.3 6.9

 2402 Removal of Barriers to Providing Home and 

Community-Based Services 0 0.1 0.1 0.1 0.2 0.3 0.3 0.4 0.4 0.4 0.5 2.3

 2403 Money Follows the Person Rebalancing Demonstration 0 0 0 * 0.1 0.2 0.3 0.4 0.3 0.3 0.2 1.7

 2404 Protection for Recipients of Home and Community-Based 

Services Against Spousal Impoverishment 0 0 0 0 0.2 0.3 0.3 0.3 0.3 0.2 0.2 1.5

 2405 Expand State Aging and Disability Resource Centers * * * * * * * * 0 0 * 0.1

 2406 Sense of the Senate Regarding Long-Term Care 0 0 0 0 0 0 0 0 0 0 0 0

Incentives for States to Offer Home and Community-Based 

Services as a Long-Term Care Alternative to Nursing Homes 0 * 0.1 0.2 0.2 0.3 0.2 0.2 0.2 0.2 0.6 1.6

Congressional Budget Office Page 2 of 15 12/19/2009
Table 5. Estimate of Effects on Direct Spending and Revenues for Non-Coverage Provisions 

of the Patient Protection and Affordable Care Act, Incorporating the Manager's Amendment

By fiscal year, in billions of dollars. 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Subtitle F—Medicaid Prescription Drug Coverage -0.8 -2.6 -3.2 -3.3 -3.7 -4.1 -4.7 -5.0 -5.3 -5.7 -13.5 -38.4

Subtitle G—Medicaid Disproportionate Share Hospital Payments 0 0 * * * -2.8 -3.7 -3.9 -4.0 -4.1 * -18.5

Subtitle H—Improved Coordination for Dual Eligible Beneficiaries

 2601 5-Year Period for Demonstration Projects 0 0 0 0 0 0 0 0 0 0 0 0

 2602 Providing Federal Coverage and Payment Coordination 

for Dual Eligible Beneficiaries 0 0 0 0 0 0 0 0 0 0 0 0

Subtitle I—Improving the Quality of Medicaid for Patients and Providers

 2701 Adult Health Quality Measures * * * 0.1 0.1 * * * * 0 0.2 0.3

 2702 Payment Adjustment for Health Care-Acquired Conditions 0 0 * * * * * * * * * *

 2703 State Option to Provide Health Homes for Enrollees With 

Chronic Conditions 0 * * 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.7

 2704 Demonstration Project to Evaluate Integrated Care 

Around a Hospitalization 0 0 0 0 0 0 0 0 0 0 0 0

 2705 Medicaid Global Payment System Demonstration Project 0 0 0 0 0 0 0 0 0 0 0 0

 2706 Pediatric Accountable Care Organization Demonstration Project 0 0 0 0 0 0 0 0 0 0 0 0

 2707 Medicaid Emergency Psychiatric Demonstration Project 0 * * * * * 0 0 0 0 0.1 0.1

Subtitle J—Improvements to the Medicaid and CHIP Payment and 

Access Commission (MACPAC) * * 0 0 0 0 0 0 0 0 * *

Subtitle K—Protections for American Indians and Alaska Natives

 2901 Special Rules Relating to Indians

No Cost Sharing for Indians with Income at or Below 

 300 Percent of Poverty Enrolled in Coverage 

 Through a State Exchange Included in estimate for expanding health insurance coverage.

Payer of Last Resort and Express-Lane Option 0 0 0 0 0 0 0 0 0 0 0 0

 2902 Elimination of Sunset for Payment for Medicare Part B Services

Furnished by Certain Indian Hospitals and Clinics 0 * * * * * * * * * 0.1 0.2

Indian Health Improvement Act * * * * * * * * * * * *

Congressional Budget Office Page 3 of 15 12/19/2009
Table 5. Estimate of Effects on Direct Spending and Revenues for Non-Coverage Provisions 

of the Patient Protection and Affordable Care Act, Incorporating the Manager's Amendment

By fiscal year, in billions of dollars. 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

SUBTITLE F—MATERNAL AND CHILD HEALTH SERVICES 

2951 Maternal, Infant, and Early Childhood Home Visiting Programs * 0.1 0.3 0.4 0.4 0.2 0.1 * 0 0 1.2 1.5

2952 Support, Education, and Research for Postpartum Depression 0 0 0 0 0 0 0 0 0 0 0 0

2953 Personal Responsibility Education * * 0.1 0.1 0.1 0.1 * * * 0 0.3 0.4

2954 Restoration of Funding for Abstinence Education * * * * * * * * * 0 0.1 0.1

2955 Inclusion of Information About The Importance of Having a 

Health-Care Power of Attorney in Transition Planning for 

Children Aging Out of Foster Care and 

Independent Living Programs 0 0 0 0 0 0 0 0 0 0 0 0

Support for Pregnant and Parenting Teens and Women * * * * * * * * * * 0.1 0.2

TITLE III—IMPROVING THE QUALITY AND EFFICIENCY OF HEALTH CARE

Subtitle A—Transforming the Health Care Delivery System

PART I—LINKING PAYMENT TO QUALITY OUTCOMES UNDER THE MEDICARE PROGRAM

 3001 Hospital Value-Based Purchasing Program 0 0 0 0 0 0 0 0 0 0 0 0

 3002 Improvements to the Physician Quality Reporting System

Physicians' Services 0 0 0.2 0.2 0.2 0.3 -0.1 -0.2 -0.2 -0.2 0.6 0.3

PPO Stabilization Fund 0 0 0 0 -0.1 * 0 0 0 0 -0.1 -0.2

 3003 Improvements to the Physician Feedback Program 0 0 0 0 0 0 0 0 0 0 0 0

 3004 Quality Reporting for Long-Term Care Hospitals, 

Inpatient Rehabilitation Hospitals, and Hospice Programs 0 0 0 0 * * * * * * * -0.2

 3005 Quality Reporting for PPS-Exempt Cancer Hospitals 0 0 0 0 0 0 0 0 0 0 0 0

 3006 Plans for a Value-Based Purchasing Program for Skilled 

Nursing Facilities and Home Health Agencies 0 0 0 0 0 0 0 0 0 0 0 0

 3007 Value-based Payment Modifier Under the 

Physician Fee Schedule 0 0 0 0 0 0 0 0 0 0 0 0

 3008 Payment Adjustment for Conditions Acquired in Hospitals 0 0 0 0 0 -0.3 -0.3 -0.3 -0.3 -0.3 0 -1.5

PART II—NATIONAL STRATEGY TO IMPROVE HEALTH CARE QUALITY

 3011 National Strategy 0 0 0 0 0 0 0 0 0 0 0 0

 3012 Interagency Working Group on Health Care Quality 0 0 0 0 0 0 0 0 0 0 0 0

 3013 Quality Measure Development 0 0 0 0 0 0 0 0 0 0 0 0

 3014 Quality Measurement * * * * * * 0 0 0 0 0.1 0.1

 3015 Data Collection; Public Reporting 0 0 0 0 0 0 0 0 0 0 0 0

Interaction of Quality-Measure Development/Endorsement Provisions with Medicare Spending 0 0 0 0 * * * * * * * *

Congressional Budget Office Page 4 of 15 12/19/2009
Table 5. Estimate of Effects on Direct Spending and Revenues for Non-Coverage Provisions 

of the Patient Protection and Affordable Care Act, Incorporating the Manager's Amendment

By fiscal year, in billions of dollars. 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

PART III—ENCOURAGING DEVELOPMENT OF NEW PATIENT CARE MODELS

 3021 Establishment of Center for Medicare and Medicaid Innovation * 0.1 0.2 0.2 0.2 0.2 * -0.3 -0.7 -1.2 0.7 -1.3

 3022 Medicare Shared Savings Program * * * -0.1 -0.3 -0.6 -0.7 -0.9 -1.0 -1.2 -0.5 -4.9

 3023 National Pilot Program on Payment Bundling 0 0 0 * * * * * * * * *

 3024 Independence at Home Demonstration Program * * * * * * 0 0 0 0 * *

 3025 Hospital Readmissions Reduction Program 0 0 0 -0.1 -0.3 -1.1 -1.3 -1.3 -1.4 -1.5 -0.5 -7.1

 3026 Community-Based Care Transitions Program 0 * 0.1 0.1 0.1 0.1 0.1 0 0 0 0.3 0.5

 3027 Extension of Gainsharing Demonstration * * * * * 0 0 0 0 0 * *

Subtitle B—Improving Medicare for Patients and Providers

PART I—ENSURING BENEFICIARY ACCESS TO PHYSICIAN CARE AND OTHER SERVICES

 3101 Increase in the Physician Payment Update 0 0 0 0 0 0 0 0 0 0 0 0

 3102 Extension of the Work Geographic Index Floor and Revisions 

to the Practice Expense Geographic Adjustment 0.7 0.9 0.3 0 0 0 0 0 0 0 1.8 1.8

 3103 Extension of Exceptions Process for Medicare Therapy Caps 0.6 0.2 0 0 0 0 0 0 0 0 0.8 0.8

 3104 Extension of Payment for Technical Component of 

Certain Physician Pathology Services 0.1 * 0 0 0 0 0 0 0 0 0.1 0.1

 3105 Extension of Ambulance Add-Ons 0.1 * 0 0 0 0 0 0 0 0 0.1 0.1

 3106 Extension of Certain Payment Rules for Long-Term Care 

Hospital Services and of Moratorium on the 

Establishment of Certain Hospitals and Facilities 0 0.1 0.1 * 0 0 0 0 0 0 0.2 0.2

 3107 Extension of Physician Fee Schedule Mental Health Add-On * * 0 0 0 0 0 0 0 0 * *

 3108 Permitting Physician Assistants to Order Post-Hospital 

Extended Care Services * * * * * * * * * * * *

 3109 Exemption of Certain Pharmacies From 

Accreditation Requirements 0 0 0 0 0 0 0 0 0 0 0 0

 3110 Part B Special Enrollment Period for Disabled 

TRICARE Beneficiaries * * * * * * * * * * * *

 3111 Payment for Bone Density Tests 0.1 0.1 * 0 0 0 0 0 0 0 0.1 0.1

 3112 Revision to the Medicare Improvement Fund 0 0 0 0 -16.7 -5.6 0 0 0 0 -16.7 -22.3

 3113 Treatment of Certain Complex Diagnostic Laboratory Tests 0 * * * 0 0 0 0 0 0 0.1 0.1

 3114 Improved Access for Certified-Midwife Services 0 * * * * * * * * * * *

Congressional Budget Office Page 5 of 15 12/19/2009
Table 5. Estimate of Effects on Direct Spending and Revenues for Non-Coverage Provisions 

of the Patient Protection and Affordable Care Act, Incorporating the Manager's Amendment

By fiscal year, in billions of dollars. 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

PART II—RURAL PROTECTIONS

 3121 Extension of Outpatient Hold Harmless Provision 0.1 * 0 0 0 0 0 0 0 0 0.2 0.2

 3122 Payments for Certain Clinical Diagnostic Laboratory Tests 

Furnished to Hospital Patients in Certain Rural Areas * * 0 0 0 0 0 0 0 0 * *

 3123 Extension of the Rural Community Hospital 

Demonstration Program 0 0 0 0 0 0 0 0 0 0 0 0

 3124 Extension of the Medicare-Dependent Hospital Program 0 0 * * 0 0 0 0 0 0 * *

 3125 Payment Adjustment for Low-Volume Hospitals 0 0.1 0.2 * 0 0 0 0 0 0 0.3 0.3

 3126 Demonstration Project on Community Health Integration 

Models in Certain Rural Counties 0 0 0 0 0 0 0 0 0 0 0 0

 3127 MedPAC Study on Adequacy of Medicare Payments for 

Health Care Providers Serving in Rural Areas 0 0 0 0 0 0 0 0 0 0 0 0

 3128 Technical Correction Related to 

Critical Access Hospital Services 0 0 0 0 0 0 0 0 0 0 0 0

 3129 Medicare Rural Hospital Flexibility Program 0 0 0 0 0 0 0 0 0 0 0 0

PART III—IMPROVING PAYMENT ACCURACY

 3131 Payment Adjustments for Home Health Care (includes effect 

of section 3401) -0.1 -0.5 -0.8 -1.1 -1.8 -3.2 -5.2 -7.4 -9.0 -10.3 -4.3 -39.4

 3132 Hospice Reform 0 * * * * * * * * * * -0.1

 3133 Medicare Disproportionate Share Hospital Payments 0 0 0 0 0 -3.6 -4.4 -5.6 -5.0 -5.8 0 -24.4

 3134 Misvalued Codes Under the Physician Fee Schedule 0 0 0 0 0 0 0 0 0 0 0 0

 3135 Modification of Equipment Utilization Factor for 

Advanced Imaging Services -0.1 -0.2 -0.2 -0.3 -0.3 -0.4 -0.4 -0.4 -0.4 -0.4 -1.1 -3.0

 3136 Revision of Payment for Power-Driven Wheelchairs 0 -0.4 -0.1 * * * * -0.1 -0.1 -0.1 -0.6 -0.8

 3137 Hospital Wage Index Improvement 0.2 * 0 0 0 0 0 0 0 0 0.3 0.3

 3138 Treatment of Certain Cancer Hospitals 0 0 0 0 0 0 0 0 0 0 0 0

 3139 Payment for Biosimilar Biological Products Included in estimate for title VII, subtitle A.

 3140 Medicare Hospice Concurrent Care Demonstration Program 0 0 * * * * 0 0 0 0 * *

 3141 Application of Budget Neutrality on a National Basis in the 

Calculation of the Medicare Hospital Wage Index Floor 0 0 0 0 0 0 0 0 0 0 0 0

 3142 HHS Study on Urban Medicare-Dependent Hospitals 0 0 0 0 0 0 0 0 0 0 0 0

Congressional Budget Office Page 6 of 15 12/19/2009
Table 5. Estimate of Effects on Direct Spending and Revenues for Non-Coverage Provisions 

of the Patient Protection and Affordable Care Act, Incorporating the Manager's Amendment

By fiscal year, in billions of dollars. 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Subtitle C—Provisions Relating to Part C

 3201 Medicare Advantage Payment 0 -6.2 -6.7 -10.4 -11.1 -12.4 -14.0 -16.8 -19.0 -21.6 -34.4 -118.1

 3202 Benefit Protection and Simplification 0 0 0 0 0 0 0 0 0 0 0 0

 3203 Application of Coding Intensity Adjustment During 

Payment Transition for Medicare Advantage 0 -0.6 -0.8 -0.5 0 0 0 0 0 0 -1.9 -1.9

 3204 Simplification of Annual Beneficiary Election Periods * * * * * * * * * * * *

Extension for Specialized Medicare Advantage Plans 

 3205 for Special Needs Individuals 0 0.2 0.2 0.2 0.1 0.1 * * * * 0.7 0.9

 3206 Extension of Reasonable Cost Contracts 0 * * * 0 0 0 0 0 0 * *

 3207 Technical Correction to MA Private Fee-for-Service Plans 0 * * * * * * * * * 0.1 0.1

 3208 Making Senior Housing Facility Demonstration Permanent Included in estimate for section 3205.

3209 Authority to Deny Plan Bids Included in estimate for section 3201.

3210 Development of New Standards for Certain Medigap Plans 0 0 0 0 0 * * * * * 0 -0.1

Subtitle D—Medicare Part D Improvements for Prescription Drug Plans and MA–PD Plans

 3301 Medicare Coverage Gap Discount Program 0 2.5 1.9 1.4 1.6 1.8 2.2 2.4 2.5 3.2 7.4 19.5

 3302 Improvement in Determination of Medicare Part D 

Low-Income Benchmark Premium 0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.7

 3303 Voluntary de Minimis Policy for Subsidy Eligible Individuals 

Under Prescription Drug Plans and MA–PD Plans 0 * * * * * * 0.1 0.1 0.1 0.1 0.4

 3304 Special Rule for Widows and Widowers Regarding 

Eligibility for Low-Income Assistance 0 * * * * * * * * * 0.1 0.2

 3305 Improved Information for Subsidy Eligible Individuals 

Reassigned to Prescription Drug Plans and MA–PD Plans 0 0 0 0 0 0 0 0 0 0 0 0

 3306 Funding Outreach and Assistance for Low-Income Programs * * * 0 0 0 0 0 0 0 * *

 3307 Formulary Requirements With Respect to Certain 

Categories or Classes of Drugs 0 0 0 0 0 0 0 0 0 0 0 0

 3308 Part D Premiums for High-Income Beneficiaries 0 -0.4 -0.5 -0.7 -0.9 -1.1 -1.3 -1.6 -2.0 -2.4 -2.4 -10.7

 3309 Elimination of Cost Sharing for Certain 

Dual-Eligible Individuals 0 0 0.1 0.1 0.1 0.1 0.2 0.2 0.2 0.2 0.3 1.1

 3310 Reducing Wasteful Dispensing of Outpatient Prescription 

Drugs in Long-Term Care Facilities 0 0 -0.1 -0.3 -0.5 -0.8 -1.0 -1.0 -0.9 -1.1 -1.0 -5.7

 3311 Prescription Drug Plan Complaint System 0 0 0 0 0 0 0 0 0 0 0 0

 3312 Uniform Exceptions and Appeals Process 0 0 0 0 0 0 0 0 0 0 0 0

 3313 Office of the Inspector General Studies and Reports 0 0 0 0 0 0 0 0 0 0 0 0

 3314 Including Costs Incurred by AIDS Drug Assistance Programs 

and Indian Health Service in Providing Prescription Drugs 

Toward the Annual Out-of-Pocket Threshold Under Part D 0 * 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.6

 3315 Immediate Reduction in Coverage Gap in 2010 Included in estimate for section 3301.

Part D Medication Therapy Management Programs 0 0 0 0 0 0 0 0 0 0 0 0

Congressional Budget Office Page 7 of 15 12/19/2009
Table 5. Estimate of Effects on Direct Spending and Revenues for Non-Coverage Provisions 

of the Patient Protection and Affordable Care Act, Incorporating the Manager's Amendment

By fiscal year, in billions of dollars. 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Subtitle E—Ensuring Medicare Sustainability

 3401 Revision of Certain Market Basket Updates and Incorporation 

of Productivity Improvements into Market Basket Updates 

that do not Already Incorporate Such Improvements 

(effect of productivity adjustment for home health services 

included in estimate for section 3131) -0.2 -1.1 -3.9 -7.4 -11.2 -15.0 -19.1 -23.8 -29.3 -36.0 -23.7 -147.0

 3402 Temporary Adjustment to the Calculation of Part B Premiums 0 -1.3 -1.9 -1.9 -2.5 -2.6 -2.8 -3.2 -4.0 -4.9 -7.5 -25.0

 3403 Independent Medicare Advisory Board 0 0 * * * -1.5 -4.0 -5.6 -7.7 -9.4 * -28.2

Subtitle F—Health Care Quality Improvements 0 0 0 0 0 0 0 0 0 0 0 0

Medicare Coverage For Individuals Exposed To 

Environmental Health Hazards * * * * * * * * * * 0.1 0.3

Protections for Frontier States 0 0.1 0.2 0.2 0.2 0.2 0.2 0.2 0.3 0.3 0.8 2.0

Delay Implementation of RUG-IV 0 0 0 0 0 0 0 0 0 0 0 0

Pilot Testing of Pay-for-Performance 0 0 0 0 0 0 0 0 0 0 0 0

Methodology to Assess Health Plan Value 0 0 0 0 0 0 0 0 0 0 0 0

Modernizing CMS Computer and Data Systems 0 0 0 0 0 0 0 0 0 0 0 0

Public Reporting of Performance Information 0 0 0 0 0 0 0 0 0 0 0 0

Medicare Data 0 0 0 0 0 0 0 0 0 0 0 0

Community-Based Collaborative Care Networks 0 0 0 0 0 0 0 0 0 0 0 0

Report On Access To High-Quality Dialysis Services 0 0 0 0 0 0 0 0 0 0 0 0

Congressional Budget Office Page 8 of 15 12/19/2009
Table 5. Estimate of Effects on Direct Spending and Revenues for Non-Coverage Provisions 

of the Patient Protection and Affordable Care Act, Incorporating the Manager's Amendment

By fiscal year, in billions of dollars. 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

TITLE IV—PREVENTION OF CHRONIC DISEASE AND IMPROVING PUBLIC HEALTH 

SUBTITLE A—MODERNIZING DISEASE PREVENTION AND PUBLIC HEALTH SYSTEMS 

 4002 Prevention and Public Health Fund 0.1 0.6 0.8 1.0 1.3 1.6 1.8 1.9 2.0 2.0 3.7 12.9

Sections 4001, 4003, 4004 0 0 0 0 0 0 0 0 0 0 0 0

SUBTITLE B—INCREASING ACCESS TO CLINICAL PREVENTIVE SERVICES 

 4101 School-Based Health Centers 0 * * * * * 0 0 0 0 0.1 0.1

 4102 Oral Healthcare Prevention Activities 0 0 0 0 0 0 0 0 0 0 0 0

 4103 Medicare Coverage of Annual Wellness Visit Providing 

a Personalized Prevention Plan 0.2 0.3 0.3 0.3 0.4 0.4 0.4 0.4 0.4 0.5 1.6 3.7

 4104 Removal of Barriers to Preventive Services in Medicare 0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.3 0.8

 4105 Evidence-Based Coverage of Preventive Services in Medicare * * -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.3 -0.7

 4106 Improving Access to Preventive Services for 

Eligible Adults in Medicaid 0 0 0 * * * * * * * * 0.1

 4107 Coverage of Comprehensive Tobacco Cessation Services 

for Pregnant Women in Medicaid 0 0 0 * * * * * * * * -0.1

 4108 Incentives for Prevention of Chronic Diseases in Medicaid 0 * 0.1 * * 0 0 0 0 0 0.1 0.1

SUBTITLE C—CREATING HEALTHIER COMMUNITIES 

 4201 Community Transformation Grants 0 0 0 0 0 0 0 0 0 0 0 0

 4202 Healthy Aging, Living Well; Evaluation of Community-Based 

Prevention and Wellness Programs in Medicare * * * 0 0 0 0 0 0 0 0.1 0.1

 4203 Removing Barriers and Improving Access to Wellness 

for Individuals With Disabilities Forthcoming. 0 0 0 0 0 0 0 0 0 0 0 0

 4204 Immunizations * 0 0 0 0 0 0 0 0 0 * *

 4205 Nutrition Labeling at Chain Restaurants Forthcoming. 0 0 0 0 0 0 0 0 0 0 0 0

 4206 Demonstration Project Concerning

Individualized Wellness Plan 0 0 0 0 0 0 0 0 0 0 0 0

 4207 Reasonable Break Time for Nursing Mothers Forthcoming. 0 0 0 0 0 0 0 0 0 0 0 0

Congressional Budget Office Page 9 of 15 12/19/2009
Table 5. Estimate of Effects on Direct Spending and Revenues for Non-Coverage Provisions 

of the Patient Protection and Affordable Care Act, Incorporating the Manager's Amendment

By fiscal year, in billions of dollars. 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

SUBTITLE D—SUPPORT FOR PREVENTION AND PUBLIC HEALTH INNOVATION 

 4301 Research On Optimizing The Delivery of Public Health Services 0 0 0 0 0 0 0 0 0 0 0 0

 4302 Understanding Health Disparities: Data Collection and Analysis 0 0.1 0.1 0.1 0 0 0 0 0 0 0.2 0.2

 4303 CDC and Employer-Based Wellness Programs 0 0 0 0 0 0 0 0 0 0 0 0

 4304 Epidemiology-Laboratory Capacity Grants 0 0 0 0 0 0 0 0 0 0 0 0

 4305 Advancing Research and Treatment for Pain-Care Management 0 0 0 0 0 0 0 0 0 0 0 0

 4306 Funding for Childhood Obesity Demonstration Project * * * * * 0 0 0 0 0 * *

Better Diabetes Care 0 0 0 0 0 0 0 0 0 0 0 0

Grants for Workplace Wellness 0 0 0 0 0 0 0 0 0 0 0 0

Cures Acceleration Network 0 0 0 0 0 0 0 0 0 0 0 0

Centers of Excellence for Depression 0 0 0 0 0 0 0 0 0 0 0 0

Programs Relating to Congenital Heart Disease 0 0 0 0 0 0 0 0 0 0 0 0

Automated Defibrillation 0 0 0 0 0 0 0 0 0 0 0 0

Young Women's Breast Health 0 0 0 0 0 0 0 0 0 0 0 0

SUBTITLE E—MISCELLANEOUS PROVISIONS 0 0 0 0 0 0 0 0 0 0 0 0

TITLE V—HEALTH CARE WORKFORCE

Subtitle A—Purpose and Definitions 0 0 0 0 0 0 0 0 0 0 0 0

Subtitle B—Innovations in the Health Care Workforce 0 0 0 0 0 0 0 0 0 0 0 0

Alaska Task Force 0 0 0 0 0 0 0 0 0 0 0 0

Subtitle C—Increasing the Supply of the Health Care Workforce 0 0 0 0 0 0 0 0 0 0 0 0

Subtitle D—Enhancing Health Care Workforce Education and Training

Sections 5301-5314 0 0 0 0 0 0 0 0 0 0 0 0

 5315 United States Public Health Sciences Track Included in estimate for section 4002.

Community Health Workforce 0 0 0 0 0 0 0 0 0 0 0 0

Physician Assistant Education Programs 0 0 0 0 0 0 0 0 0 0 0 0

Family Nurse Practitioner Training Programs 0 0 0 0 0 0 0 0 0 0 0 0

Subtitle E—Supporting the Existing Health Care Workforce 0 0 0 0 0 0 0 0 0 0 0 0

Residents 0 0 0 0 0 0 0 0 0 0 0 0

Congressional Budget Office Page 10 of 15 12/19/2009
Table 5. Estimate of Effects on Direct Spending and Revenues for Non-Coverage Provisions 

of the Patient Protection and Affordable Care Act, Incorporating the Manager's Amendment

By fiscal year, in billions of dollars. 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Subtitle F—Strengthening Primary Care and Other Workforce Improvements

 5501 Expanding Access to Primary Care Services and 

General Surgery Services 0 0.4 0.6 0.7 0.7 0.8 0.3 0 0 0 2.5 3.5

 5502 Medicare Federally Qualified Health Centers 0 * * * * 0.1 0.1 0.1 0.1 0.1 * 0.4

 5503-5506 Medicare Graduate Medical Education Policies * * 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.2 0.4 1.2

 5507 Demonstration Projects to Address Health Professions 

Workforce Needs; Extension of 

Family-To-Family Health Information Centers * 0.1 0.1 0.1 0.1 0.1 * * 0 0 0.4 0.4

 5508 Increasing Teaching Capacity 0 * * * * * * * * * 0.2 0.2

 5509 Graduate Nurse Education Demonstration Program 0 0 * 0.1 0.1 0.1 * 0 0 0 0.1 0.2

Subtitle G—Improving Access to Health Care Services 0 0 0 0 0 0 0 0 0 0 0 0

Funding for Community Health Centers and the

National Health Service Corps 0 0.5 1.8 1.4 1.7 2.6 1.5 0.2 * 0 5.5 9.8

State Grants to Providers 0 0 0 0 0 0 0 0 0 0 0 0

Medical Training in Underserved Communities 0 0 0 0 0 0 0 0 0 0 0 0

Preventive Medicine and Public Health Training Program 0 0 0 0 0 0 0 0 0 0 0 0

Scholarship and Loan Program 0 0 0 0 0 0 0 0 0 0 0 0

Infrastructure to Expand Access to Care 0 0.1 * * 0 0 0 0 0 0 0.1 0.1

Demonstration Program to Provide Access to Affordable Care 0 0 0 0 0 0 0 0 0 0 0 0

Subtitle H—General Provisions 0 0 0 0 0 0 0 0 0 0 0 0

Congressional Budget Office Page 11 of 15 12/19/2009
Table 5. Estimate of Effects on Direct Spending and Revenues for Non-Coverage Provisions 

of the Patient Protection and Affordable Care Act, Incorporating the Manager's Amendment

By fiscal year, in billions of dollars. 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

TITLE VI—TRANSPARENCY AND PROGRAM INTEGRITY

Subtitle A—Physician Ownership and Other Transparency

 6001 Limitation on Medicare Exception to the Prohibition on 

Certain Physician Referrals for Hospitals * * * * * -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.5

 6002 Transparency Reports and Reporting of Physician 

Ownership or Investment Interests 0 0 0 0 0 0 0 0 0 0 0 0

 6003 Disclosure Requirements for In-Office Ancillary Services 

Exception to the Prohibition on Physician Self-Referral 

for Certain Imaging Services 0 0 0 0 0 0 0 0 0 0 0 0

 6004 Prescription Drug Sample Transparency 0 0 0 0 0 0 0 0 0 0 0 0

 6005 Pharmacy Benefit Managers Transparency Requirements 0 0 0 0 0 0 0 0 0 0 0 0

Subtitle B—Nursing Home Transparency and Improvement 0 0 0 0 0 0 0 0 0 0 0 0

Subtitle C—Nationwide Program for National and State Background Checks on Direct Patient Access Employees of Long-term Care Facilities and Providers * * * 0 0 0 0 0 0 0 0.1 0.1

Subtitle D—Patient-Centered Outcomes Research

6301 Patient-Centered Outcomes Research

 Medicare 0 0 * * * * * * -0.1 -0.2 0.1 -0.3

 Non-Medicare * * 0.1 0.1 0.2 0.3 0.4 0.4 0.4 0.5 0.4 2.5

6302 Federal Coordinating Council for 

Comparative Effectiveness Research 0 0 0 0 0 0 0 0 0 0 0 0

Congressional Budget Office Page 12 of 15 12/19/2009
Table 5. Estimate of Effects on Direct Spending and Revenues for Non-Coverage Provisions 

of the Patient Protection and Affordable Care Act, Incorporating the Manager's Amendment

By fiscal year, in billions of dollars. 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Subtitle E—Medicare, Medicaid, and CHIP Program Integrity Provisions

 6401 Provider Screening and Other Enrollment Requirements * * * * * * * * * * * -0.2

 6402 Medicare and Medicaid Program Integrity Provisions * -0.2 -0.3 -0.3 -0.3 -0.3 -0.4 -0.4 -0.4 -0.4 -1.3 -3.2

 6403 Elimination of Duplication Between the 

Healthcare Integrity and Protection Data Bank and 

the National Practitioner Data Bank 0 0 0 0 0 0 0 0 0 0 0 0

 6404 Maximum Period for Submission of Medicare Claims 0 0 0 0 0 0 0 0 0 0 0 0

 6405 Physicians Who Order Items or Services Required to Be 

Medicare-Enrolled Physicians or Eligible Professionals * * * * * * -0.1 -0.1 -0.1 -0.1 -0.2 -0.4

 6406 Requirement for Physicians to Provide Documentation on 

Referrals to Programs At High Risk of Waste and Abuse 0 0 0 0 0 0 0 0 0 0 0 0

 6407 Face to Face Encounter With Patient Required Before Physicians 

May Certify Eligibility for Home Health Services or 

Durable Medical Equipment Under Medicare * -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.2 -0.3 -1.0

 6408 Enhanced Penalties 0 0 0 0 0 0 0 0 0 0 0 0

 6409 Medicare Self-Referral Disclosure Protocol 0 0 0 0 0 0 0 0 0 0 0 0

 6410 Adjustments to the Medicare Competitive Acquisition Program 

for Durable Medical Equipment, Prosthetics, Orthotics, 

and Supplies * * * -0.1 -0.2 -0.2 -0.2 -0.2 -0.2 -0.2 -0.3 -1.4

6411 Expansion of the Recovery Audit Contractor Program 0 * * * * * * * * * * *

Health Care Fraud Enforcement 0 0 0 0 0 0 0 0 0 0 0 0

Subtitle F—Additional Medicaid Program Integrity Provisions

 6501 Termination of Provider Participation Under Medicaid if 

Terminated Under Medicare or Other State Plan 0 0 0 0 0 0 0 0 0 0 0 0

 6502 Medicaid Exclusion From Participation Relating to Certain 

Ownership, Control, and Management Affiliations 0 0 0 0 0 0 0 0 0 0 0 0

 6503 Billing Agents, Clearinghouses, or Other Alternate Payees 

Required to Register Under Medicaid 0 0 0 0 0 0 0 0 0 0 0 0

 6504 Requirement to Report Expanded Set of Data Elements 

Under MMIS to Detect Fraud and Abuse 0 0 0 0 0 0 0 0 0 0 0 0

 6505 Prohibition on Payments to Institutions or Entities Located 

Outside of the United States 0 0 0 0 0 0 0 0 0 0 0 0

 6506 Overpayments 0.1 * * * * * * * * * 0.1 0.1

6507 Mandatory State Use of National Correct Coding Initiative 0 * * * * * * * * * -0.1 -0.3

6508 General Effective Date 0 0 0 0 0 0 0 0 0 0 0 0

Congressional Budget Office Page 13 of 15 12/19/2009
Table 5. Estimate of Effects on Direct Spending and Revenues for Non-Coverage Provisions 

of the Patient Protection and Affordable Care Act, Incorporating the Manager's Amendment

By fiscal year, in billions of dollars. 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Subtitle G—Additional Program Integrity Provisions 0 0 0 0 0 0 0 0 0 0 0 0

State Demonstration Programs: Alternatives to Tort Litigation 0 0 0 0 0 0 0 0 0 0 0 0

Liability Coverage in Free Clinics 0 * * * * * * * * * * 0.1

FDA Labeling Changes * * * * * * * * * * * -0.1

Subtitle H—Elder Justice Act 0 0 0 0 0 0 0 0 0 0 0 0

Subtitle I—Sense of the Senate Regarding Medical Malpractice 0 0 0 0 0 0 0 0 0 0 0 0

TITLE VII—IMPROVING ACCESS TO INNOVATIVE MEDICAL THERAPIES

Subtitle A—Biologics Price Competition and Innovation 0 0 0 * -0.1 -0.4 -0.7 -1.2 -1.9 -2.7 -0.1 -7.1

Subtitle B—More Affordable Medicines for Children and Underserved Communities

 7101 Expanded Participation in 340B Program Included in estimate for section 2501.

 7102 Improvements to 340B Program Integrity 0 0 0 0 0 0 0 0 0 0 0 0

 7103 GAO Study on Improving the 340B Program 0 0 0 0 0 0 0 0 0 0 0 0

TITLE VIII—COMMUNITY LIVING ASSISTANCE SERVICES 

 AND SUPPORTS 0 -3.7 -6.4 -8.7 -9.9 -11.2 -9.6 -8.6 -7.5 -6.8 -28.7 -72.5

TITLE IX—REVENUE PROVISIONS Estimates provided by the Joint Committee on Taxation in a Separate Table

INTERACTIONS

Medicare Advantage Interactions 0 1.0 -0.5 -1.1 -1.9 -2.0 -2.4 -2.8 -3.0 -4.0 -2.5 -16.6

Premium Interactions 0 0.1 0.5 1.1 6.1 4.1 3.8 4.8 5.7 6.7 7.9 32.8

Implementation of Medicare Changes * * * * * * * * * * * 0.1

Medicare Part D Interactions with 

Medicare Advantage Provisions 0 0.1 0.1 0.3 0.3 0.4 0.4 0.4 0.4 0.5 0.8 3.0

Medicare Part B Interactions with 

Medicare Part D Provisions 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.4 0.9

Medicaid Interactions with Medicare Part D Provisions * * * * * 0.1 0.1 0.1 0.1 0.2 0.1 0.6

Medicare Interaction with 340B * * * * -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.1 -0.5

TRICARE Interaction * * -0.1 -0.2 -0.2 -0.3 -0.5 -0.6 -0.8 -0.9 -0.4 -3.5

FEHB Interaction (on-budget) 0 0.1 0.1 0.1 0.2 0.2 0.2 0.3 0.3 0.4 0.4 1.8

FEHB Interaction (off-budget) 0 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.1 0.1 0.4 1.0

Total, Changes in Unified-Budget Direct Spending 4.3 -6.1 -15.9 -26.9 -45.5 -53.3 -63.3 -79.0 -91.1 -106.3 -90.0 -483.1

Congressional Budget Office Page 14 of 15 12/19/2009
Table 5. Estimate of Effects on Direct Spending and Revenues for Non-Coverage Provisions 

of the Patient Protection and Affordable Care Act, Incorporating the Manager's Amendment

By fiscal year, in billions of dollars. 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

Changes in Revenues 

Transitional Reinsurance - Collections for Early Retirees 0 0 0 0 1.5 1.5 0.8 0 0 0 1.5 3.8

Fraud, Waste, and Abuse (on-budget) * 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.4 0.9

Effect of Administrative Simplification on Revenues a

-0.1 -0.2 -0.2 * 0.5 0.9 1.3 1.9 2.0 2.0 * 8.1

Effect on Revenues of Changes in Health Insurance Premiums 

as a Result of Comparative Effectiveness Research, 

Changes in the Medicaid Drug Program, Biosimilar 

Biological Products, and FDA Labeling 

 Income and Medicare payroll taxes (on-budget) * * * * * 0.1 0.1 0.2 0.3 0.3 0.1 1.0

 Social Security payroll taxes (off-budget) * * * * * * 0.1 0.1 0.1 0.2 * 0.5

Total, Changes in Unified-Budget Revenues -0.1 -0.1 -0.1 0.2 2.1 2.6 2.4 2.2 2.5 2.6 2.0 14.2

Changes in Unified-Budget Deficits 4.4 -6.0 -15.8 -27.1 -47.5 -55.8 -65.6 -81.2 -93.6 -108.9 -92.1 -497.3

Memorandum:

Non-scoreable Effects

Savings from increased HCFAC spending 0 * * -0.1 -0.1 -0.2 -0.2 -0.3 -0.3 -0.4 -0.3 -1.6

Expansion of the Recovery Audit Contractor (RAC) 

Program in Medicaid 0 * * * * * * * -0.1 -0.1 -0.1 -0.3

NOTES: * = between -$50 million and $50 million.

AIDS = Acquired Immune-Deficiency Syndrome; CDC = Center for Disease Control and Prevention; CHIP = Children's Health Insurance Program; 

CMS = Centers for Medicare & Medicaid Services; FMAP = federal medical assistance percentage; FDA = Food and Drug Administration; 

GAO = Government Accountability Office; HCFAC = Health Care Fraud and Abuse Control; HHS = Department of Health and Human Services; MA = Medicare Advantage; 

MA-PD = Medicare Advantage prescription drug plan; MedPAC = Medicare Payment Advisory Commission; MMIS = Medicaid Management Information System; 

PPO = preferred provider organization; PPS = prospective payment system; RUG-IV = Resource Utilization Group, version four.

a. Includes both on- and off-budget revenues.

Congressional Budget Office Page 15 of 15 12/19/2009
JOINT 

Provision Effective 2010 2011 2012 2013 2014 2015 2016 2017 

Revenue Offset Provisions

1. 40% excise tax on health coverage in excess of

$8,500/$23,000 indexed for inflation by CPI-Uplus 1% and increased thresholds for over age 55retirees or certain high-risk professions; levied atinsurer level; employer aggregates and issuesinformation return for insurers indicating amountsubject to the excise tax; nondeductible; high 17state transition relief [2]............................................ tyba 12/31/12 --- --- --- 7.1 13.0 17.0 21.6 25.8 

2. Employer W-2 reporting of value of health

benefits...................................................................... tyba 12/31/10

3. Conform the definition of medical expenses for

health savings accounts, Archer MSAs, healthflexible spending arrangements, and healthreimbursement arrangements to the definition ofthe itemized deduction for medical expenses(excluding over-the-counter medicines prescribedby a physician) [2]..................................................... tyba 12/31/10 --- 0.4 0.6 0.6 0.6 0.6 0.6 0.6 

4. Increase the penalty for nonqualified health

savings account distributions to 20%........................ dma 12/31/10 --- [3] [3] 0.1 0.1 0.1 0.2 0.2 

5. Limit health flexible spending arrangements in

cafeteria plans to $2,500, indexed to CPI-U after2011 [2] [4]............................................................... tyba 12/31/10 --- 0.6 0.9 1.6 1.9 1.8 1.7 1.7 

6. Require information reporting on payments to

corporations............................................................... pma 12/31/11 --- --- 0.4 3.3 2.0 2.1 2.2 2.3 

7. Additional requirements for section 501(c)(3)

hospitals.................................................................... tyba DOE

8. Impose $2.3 billion annual fee on

manufacturers and importers of branded drugs......... [5] 2.0 2.2 2.2 2.2 2.2 2.2 2.2 2.2 

THE "PATIENT PROTECTION AND AFFORDABLE CARE ACT" [1]

ESTIMATED REVENUE EFFECTS OF THE MANAGER'S AMENDMENT TO THE REVENUE PROVISIONS CONTA

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Negligible Revenue Effect - - - 

Fiscal Years 2010 - 2019 

[Billions of Dollars] 

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Negligible Revenue Effect - - - 
Page 2

Provision Effective 2010 2011 2012 2013 2014 2015 2016 2017 

9. Impose annual fee on manufacturers and importers

of certain medical devices ($2 billion per year for2011 through 2017; and $3 billion per yearthereafter).................................................................. [6] --- 1.8 2.0 2.0 2.0 2.0 2.0 2.0 

10. Impose annual fee on health insurance providers

($2 billion for 2011, $4 billion for 2012, $7 billionfor 2013, and $9 billion per year for 2014 through2016, $10 billion thereafter, with certainexceptions)................................................................ [7] --- 1.6 3.3 5.8 7.6 7.8 7.8 8.5 

11. Study and report of effect on veterans health care.... DOE12. Eliminate deduction for expenses allocable to

Medicare Part D subsidy........................................... tyba 12/31/10 --- 0.3 0.5 0.5 0.6 0.6 0.6 0.7 

13. Raise 7.5% AGI floor on medical expenses

deduction to 10%; AGI floor for individuals age65 and older (and their spouses) remains at 7.5%through 2016............................................................. tyba 12/31/12 --- --- --- 0.4 1.5 1.6 1.7 2.5 

14. $500,000 deduction limitation on taxable year

remuneration to officers, employees, directors,and service providers of covered health insuranceproviders.................................................................... [8] --- --- --- 0.1 0.1 0.1 0.1 0.1 

15. Raise the hospital insurance tax on wages and

self-employment income in excess of $200,000($250,000 joint) by 0.9 percentage points,unindexed [2]............................................................ tyba 12/31/12 --- --- --- 13.3 6.0 10.4 13.1 14.1 

16. Modification of section 833 treatment of certain

health organizations.................................................. tyba 12/31/09 [3] 0.1 0.1 [3] [3] [3] [3] [3] 

17. Impose 10% excise tax on indoor tanning services... spo/a 7/1/10 [9] 0.2 0.2 0.3 0.3 0.3 0.3 0.3 

Total of Revenue Offset Provisions................................................ 2.0 7.2 10.2 37.3 37.9 46.6 54.1 61.0 

Other Provisions

1. Provide income exclusion for specified Indian

tribe health benefits................................................... [10] --- [9] [9] [9] [9] [9] [9] [9] 

2. Simple cafeteria plan nondiscrimination safe

harbor for certain small employers............................ tyba 12/31/10

3. Qualifying therapeutic discovery project credit

(sunset 12/31/10)....................................................... [11] -0.4 -0.2 -0.1 -0.1 [9] [9] --- --- 

4. Exclusion for assistance provided to participants in

state student loan repayment programs for certainhealth professionals................................................... tyba 12/31/08 [9] [9] [9] [9] [9] [9] [9] [9] 

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - No Revenue Effect - - - - - - 

- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - Negligible Revenue Effect - - - 
Page 3

Provision Effective 2010 2011 2012 2013 2014 2015 2016 2017 

5. Make the adoption credit refundable; increase

qualifying expenses threshold, and extend theadoption credit through 2011.................................... tyba 12/31/09 -0.2 -0.6 -0.5 [3] --- --- --- --- 

Total of Other Provisions......................................................... -0.6 -0.8 -0.6 -0.1 [9] [9] [9] [9] Revenue-Related Provision - Impose Fee onInsured and Self-Insured Health Plans; PatientCentered Outcomes Research Trust Fund............... [12] --- --- --- 0.1 0.3 0.3 0.4 0.4 

 NET TOTAL ................................................................................. 1.4 6.4 9.6 37.3 38.2 46.9 54.5 61.4 

Joint Committee on Taxation -------------------------------------- NOTE: Details may not add to totals due to rounding.Legend for "Effective" column: 

dma = distributions made after pma = payments made after tyba = taxaDOE = date of enactment spo/a = services performed on or after

[1] Details of estimates of tax provisions included in Title I are reported in the forthcoming letter from the Congressional Budget Office to the Honorable Harry R

Leader, regarding the budgetary effects of the “Patient Protection and Affordable Care Act” and incorporating the effects of the Managers’ Amendment.

[2] Estimate includes the following off-budget effects: 2010 2011 2012 2013 2014 2015 2016 2017 

40% excise tax on health coverage............................................. --- --- --- 1.5 2.7 3.5 4.5 5.4 Conform the definition of medical expenses.................................... --- 0.1 0.1 0.1 0.2 0.2 0.2 0.2 

Limit health flexible spending arrangements................................. --- 0.1 0.2 0.4 0.5 0.5 0.5 0.4 0.9 percentage point increase to hospital insurance tax ..................... --- --- --- 3.0 -1.5 -0.7 -0.1 -0.1 

[3] Gain of less than $50 million.[4] Estimate includes interaction with the high premium excise tax.[5] Effective for calendar years beginning after December 31, 2009; fee is allocated based on market share of branded prescription drug sales for calendar years b[6] Effective for calendar years beginning after December 31, 2010; fee is allocated based on market share of certain medical device sales for calendar years begi[7] Effective for calendar years beginning after December 31, 2010; fee is allocated based on market share of net premiums written for any United States health r

years beginning after December 31, 2009.

[8] Effective for remuneration paid in taxable years beginning after 2012 with respect to services performed after 2009.[9] Loss of less than $50 million.

[10] Effective for health benefits and coverage provided after the date of enactment.[11] Effective for amounts paid or incurred after December 31, 2008, in taxable years beginning after December 31, 2008.[12] Effective for each policy plan year ending after September 30, 2012, but does not apply to policy years ending after September 31, 2019.
CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director

U.S. Congress

Washington, DC 20515

December 20, 2009 

Honorable Harry Reid 

Majority Leader 

United States Senate 

Washington, DC 20510 

Dear Mr. Leader:

The Congressional Budget Office (CBO) has discovered an error in the cost estimate 

released on December 19, 2009, related to the longer-term effects on direct spending of 

the manager’s amendment to the Patient Protection and Affordable Care Act (PPACA), 

Senate Amendment 2786 in the nature of a substitute to H.R. 3590 (as printed in the 

Congressional Record on November 19, 2009). 

Correcting that error has no impact on the estimated effects of the legislation during the 

2010–2019 period. However, the correction reduces the degree to which the legislation 

would lower federal deficits in the decade after 2019. 

The legislation would establish an Independent Payment Advisory Board, which would 

be required, under certain circumstances, to recommend changes to the Medicare 

program to limit the rate of growth in that program’s spending. Those recommendations 

would go into effect automatically unless blocked by subsequent legislative action. In its 

original estimate, CBO wrote that: “Such recommendations would be required if the 

Chief Actuary for the Medicare program projected that the program’s spending per 

beneficiary would grow more rapidly than a measure of inflation (the average of the 

growth rates of the consumer price index for medical services and the overall index for 

all urban consumers).” That statement is correct for fiscal years 2015 through 2019. After 

2019, however, the threshold for Medicare spending growth that would trigger 

recommendations for spending reductions would be higher—specifically, the rate of 

increase in gross domestic product (GDP) per capita plus 1 percentage point. 

With this corrected reading, savings from changes to the Medicare program (along with 

other changes to direct spending that are not associated directly with expanded insurance 

coverage) would increase at a rate that is between 10 percent and 15 percent per year 

during the 2020–2029 period, compared with a growth rate of nearly 15 percent reported 

in the initial estimate. The long-run budgetary effects of the other broad categories of the 

legislation are unchanged from the initial estimate. All told, CBO expects that the 

legislation, if enacted, would reduce federal budget deficits over the decade after 2019 
relative to those projected under current law—with a total effect during that decade that is 

in a broad range between one-quarter percent and one-half percent of GDP. In 

comparison, the extrapolations in the initial estimate implied a reduction in deficits in the 

2020–2029 period that would be in a broad range around one-half percent of GDP. The 

imprecision of these calculations reflects the even greater degree of uncertainty that 

attends to them, compared with CBO’s 10-year budget estimates. The expected reduction 

in deficits would represent a small share of the total deficits that would be likely to arise 

in that decade under current policies. 

Relative to the legislation as originally proposed, the expected reduction in deficits 

during the 2020–2029 period remains somewhat larger for the legislation incorporating 

the manager’s amendment. It also remains that case that most of that difference 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. Such recommendations would be required, in the legislation as 

originally proposed, if projected growth in Medicare spending per beneficiary exceeded 

the rate of increase in national health expenditures per capita—and in the legislation 

incorporating the manager’s amendment, if it exceeded the rate of increase in GDP plus 

1 percentage point.

Based on this extrapolation, CBO expects that Medicare spending under the legislation 

would increase at an average annual rate of roughly 6 percent during the next two 

decades—well below the roughly 8 percent annual growth rate of the past two decades 

(excluding the effect of establishing the Medicare prescription drug benefit). Adjusting 

for inflation, Medicare spending per beneficiary under the legislation would increase at 

an average annual rate of roughly 2 percent during the next two decades—well below the 

roughly 4 percent annual growth rate of the past two decades. It is unclear whether such a 

reduction in the growth rate could be achieved, and if so, whether it would be 

accomplished through greater efficiencies in the delivery of health care or would reduce 

access to care or diminish the quality of care. 

I apologize for any confusion created by this error. If you have any questions, please 

contact me. 

Sincerely, 

Douglas W. Elmendorf 

Director 

Enclosures 
cc: Honorable Mitch McConnell

Republican Leader

 Honorable Max Baucus 

 Chairman 

 Committee on Finance 

Honorable Chuck Grassley

Ranking Member

 Honorable Tom Harkin 

 Chairman 

 Committee on Health, Education, Labor, and Pensions 

 Honorable Michael B. Enzi

Ranking Member

 Honorable Kent Conrad 

 Chairman 

 Committee on the Budget 

 Honorable Judd Gregg 

Ranking Member
Premiums and Subsidies

In the course of the deliberations over health care legislation, policymakers sought information about the impact that different proposals would have on health insurance premiums—

whether for coverage obtained through an employer (the predominant form of private 

insurance coverage in the United States) or for policies purchased in the individual insurance 

market and in the proposed health insurance exchanges. To respond to that interest, CBO 

provided the following analyses: 

1. A detailed analysis of estimated health insurance premiums for the year 2016 under 

PPACA as it was originally introduced, which was conveyed in a letter to Senator Evan 

Bayh on November 30, 2009. 

2. A one-page summary of estimated average premiums in 2009 and 2016 under the law as 

it existed prior to enactment of PPACA, for purposes of comparison with estimated premiums under proposed legislation (dated December 5, 2009). 

3. An analysis of premiums for the “bronze” level of coverage specified by PPACA as 

passed by the Senate, which was conveyed in a letter to Senator Olympia Snowe on 

January 11, 2010. (Under PPACA, the bronze level of coverage will pay 60 percent of 

enrollees’ costs for covered medical services, on average; people will generally have to purchase coverage at the bronze level or higher in order to avoid paying a penalty for being 

uninsured, and larger employers will generally have to offer at least that level of coverage 

in order to avoid penalties.) 

CBO did not formally update its analysis of premium effects for subsequent versions of the 

legislation but concluded that the impacts were not likely to differ substantially from the estimates issued in November 2009. 

Many of the proposals considered by the Congress in 2009 would have established new federal subsidies for coverage purchased by individuals and families through health insurance 

exchanges. Those subsidies were often designed to limit the share of income that enrollees 

would have to pay in premiums for a specified insurance plan, usually applying a sliding scale 

so that the share of income would depend on enrollees’ income relative to the federal poverty 

level. In addition, subsidies were often proposed to cover some of the cost sharing of lowerincome enrollees in order to increase the actuarial value of their coverage. CBO provided analyses of several proposals along those dimensions, including these: 

4. A one-page table summarizing CBO’s estimates of average premiums and subsidy 

payments under a proposal considered by the Senate Finance Committee (dated 

October 9, 2009). 

5. A letter to House Ways and Means Committee Chairman Charles B. Rangel, dated 

November 2, 2009, analyzing subsidies and payments at different income levels under 

H.R. 3962, which was being considered by the House of Representatives at that time. 
PREMIUMS AND SUBSIDIES

6. A letter to Senate Majority Leader Harry Reid, dated November 20, 2009, analyzing 

subsidies and payments at different income levels under PPACA as it was originally 

introduced. 
CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director

U.S. Congress

Washington, DC 20515

 

November 30, 2009 

Honorable Evan Bayh 

United States Senate

Washington, DC 20510 

Dear Senator:

The attachment to this letter responds to your request—and the interest expressed 

by many other Members—for an analysis of how proposals being considered by 

the Congress to change the health care and health insurance systems would affect 

premiums paid for health insurance in various markets. Specifically, the 

Congressional Budget Office (CBO) and the staff of the Joint Committee on 

Taxation have analyzed how health insurance premiums might be affected by 

enactment of the Patient Protection and Affordable Care Act, as proposed by 

Senator Reid on November 18, 2009. 

I hope this information is helpful to you. If you have any further questions, please 

contact me or the CBO staff. The primary staff contact for this analysis is Philip 

Ellis.

 Sincerely,

 Douglas W. Elmendorf 

Attachment 

cc: Honorable Harry Reid

Majority Leader

 

Honorable Mitch McConnell

Republican Leader

 
Congressional Budget Office

An Analysis of Health Insurance Premiums Under the 

Patient Protection and Affordable Care Act

November 30, 2009 

There is great interest in how proposals being considered by the Congress to 

change the health care and health insurance systems would affect premiums paid 

for health insurance in various markets. Consequently, the Congressional Budget 

Office (CBO) and the staff of the Joint Committee on Taxation (JCT) have 

analyzed how those premiums might be affected by the Patient Protection and 

Affordable Care Act, an amendment in the nature of a substitute to H.R. 3590, as 

proposed by Senator Reid on November 18, 2009. The analysis looks separately 

at the effects on premiums for coverage purchased individually, coverage 

purchased by small employers, and coverage provided by large employers. 

Key Elements of the Proposed Legislation

The proposal includes many provisions that would affect insurance premiums:

• New policies purchased from insurers individually (in the “nongroup” 

market) or purchased by small employers would have to meet several new 

requirements starting in 2014. Policies would have to cover a specified set 

of services and to have an “actuarial value” of at least 60 percent (meaning 

that the plan would, on average, pay that share of the costs of providing 

covered services to a representative set of enrollees). In addition, insurers 

would have to accept all applicants during an annual open-enrollment 

period, and insurers could not limit coverage for preexisting medical 

conditions. Moreover, premiums could not vary to reflect differences in 

enrollees’ health or use of services and could vary on the basis of an 

enrollee’s age only to a limited degree. 

• A less extensive set of changes would be implemented more quickly and 

would continue in effect after 2013. Among other changes, health 

insurance plans: could not impose lifetime limits on the total amount of 

services covered; could rescind coverage only for certain reasons; would 

have to cover certain preventive services with no cost sharing; and would 

have to allow unmarried dependents to be covered under their parents’ 

policies up to age 26. Those changes would also apply to new coverage 

provided by large employers, including firms that “self-insure”—meaning 

that the firm, rather than an insurer, bears the financial risk of providing 

coverage. 
However, current policies that had been purchased in any of those markets or that 

were offered by self-insured firms would be exempt from all of those changes if 

they were maintained continuously—that is, policies held since the date of 

enactment of the legislation would be “grandfathered.” 

In addition, the proposal would: establish a mandate for most legal residents of 

the United States to obtain health insurance; set up insurance “exchanges” 

through which certain individuals and families could receive federal subsidies to 

substantially reduce the amount they would pay to purchase that coverage; make a 

public insurance plan available through those exchanges in certain states; penalize 

certain individuals if they did not obtain insurance coverage and penalize certain 

employers if their workers received subsidies through the exchanges; provide tax 

credits to certain small employers that offer coverage to their workers; 

significantly expand eligibility for Medicaid; substantially reduce the growth of 

Medicare’s payment rates for most services (relative to the growth rates projected 

under current law); levy an excise tax on insurance plans with relatively high 

premiums; impose fees on insurers and on manufacturers and importers of certain 

drugs and medical devices; and make various other changes to the federal tax 

code and to Medicare, Medicaid, and other federal programs. Each of those 

components of the legislation has the potential to affect the premiums that are 

charged for insurance, directly or indirectly; some would increase premiums, and 

others would decrease them. 

Overview of the Analysis

In general, the premium for a health insurance policy equals the average amount 

that an insurer expects to pay for services covered under the plan plus a loading 

factor that reflects the insurer’s administrative expenses and overhead (including 

any taxes or fees paid to the government) and profits (for private plans). An 

insurer’s costs for covered services reflect the scope of benefits that are covered, 

the plan’s cost-sharing requirements, the enrollees’ health status and tendency to 

use medical services, the rates at which providers are paid, and the degree of 

benefit management the insurer uses to restrain spending. Although the factors 

affecting premiums are complex and interrelated—and thus can be difficult to 

disentangle—this analysis groups the effects of the proposal on premiums into 

three broad categories: 

• Differences in the amount of insurance coverage purchased, 

• Differences in the price of a given amount of insurance coverage for a 

given group of enrollees, and 

• Differences in the types of people who obtain coverage in each insurance 

market.

CBO and JCT estimated the effect of the legislation on premiums in three broad 

insurance markets—nongroup, small group, and large group—as well as the 
contributions to the changes in premiums from each of those three sources of 

change. Several aspects of the analysis bear emphasis:

• The analysis focuses on the effects of the legislation on the average 

premium per person—that is, per covered life, including dependents 

covered by family policies. That approach provides an integrated measure 

of the impact on premiums for single coverage and family coverage, and 

those effects are expressed as percentage changes in average premiums. 

The analysis also summarizes the effects of the proposal on the dollar cost 

of the average premium per policy (rather than per insured person) and 

presents those effects separately for individual and family policies in each 

market.1

• Many individuals and families would experience changes in premiums 

that differed from the changes in average premiums in their insurance 

market.2

 As explained below, some provisions of the legislation would 

tend to decrease or increase the premiums paid by all insurance enrollees, 

while other provisions would tend to increase the premiums paid by 

healthier enrollees relative to those paid by less healthy enrollees or would 

tend to increase the premiums paid by younger enrollees relative to those 

paid by older enrollees. As a result, some individuals and families within 

each market would see changes in premiums that would be larger or 

smaller than, or be in the opposite direction of, the estimated average 

changes.

• The analysis examines the effects of the proposal in 2016 in order to 

indicate the impact that it would have once its provisions were fully 

implemented. To focus on permanent elements of the legislation, however, 

the estimates exclude the effect of the reinsurance that would be provided 

for new nongroup plans between 2014 and 2016 only (which would be 

funded by an assessment on insurers). 

 

• The analysis focuses on the effects of the legislation on total health 

insurance premiums that would be charged to individuals or employers 

before accounting for premium subsidies or the small business tax credit. 

The analysis also reports the effects of the legislation on the amounts the 

purchasers would ultimately have to pay, after accounting for those two 

forms of assistance. However, even when examining unsubsidized 

1 In some cases, the translation from premiums per person to premiums per policy is complex. To 

the extent that proposals change the average number of enrollees in a family policy, the premium 

per person in family coverage could increase even as the premium per policy decreased (for 

example, if fewer children were covered); conversely, the average premium per person could 

decrease even as the premium per policy increased (for example, if more children were covered). 

2 Consistent with CBO and JCT’s earlier estimate of the coverage and budgetary effects of the 

insurance coverage provisions in this proposal, this analysis addresses coverage of the nonelderly 

resident population. 
premiums, the analysis incorporates the effects of those subsidies (as well 

as existing tax preferences) on the number and types of people who would 

obtain coverage in each market, because those effects would have an 

important impact on the total premiums charged. 

• The analysis does not incorporate potential effects of the proposal on the 

level or growth rate of spending for health care that might stem from 

increased demand for services brought about by the insurance expansion 

or from the development and dissemination of less costly ways to deliver 

care that would be encouraged by the proposal. The impact of such 

“spillover” effects on health care spending and health insurance premiums 

is difficult to quantify precisely, but the effect on premiums in 2016 would 

probably be small. 

This analysis contains several sections. The next section summarizes the findings. 

The following three sections describe the estimated effects of the legislation on 

total premiums paid to insurers through its effects on the amount of insurance 

coverage obtained, the price of a given amount of insurance coverage for a given 

group of enrollees, and the type of people who obtain coverage. A subsequent 

section analyzes the effect of the proposal on the net cost of obtaining insurance, 

taking into account both the subsidies that would be available to individuals for 

insurance purchased through the exchanges and the tax credits that would be 

provided to small businesses. The penultimate section discusses the effects of the 

excise tax on insurance policies with relatively high premiums (the effects of 

which are accounted for separately because they would apply only to a portion of 

the market for employment-based insurance in 2016). A final section briefly 

discusses some potential effects of the proposal that are not included in the 

quantitative analysis. 

Summary of Findings

The effects of the proposal on premiums would differ across insurance markets 

(see Table 1). The largest effects would be seen in the nongroup market, which 

would grow in size under the proposal but would still account for only 17 percent 

of the overall insurance market in 2016. The effects on premiums would be much 

smaller in the small group and large group markets, which would make up 

13 percent and 70 percent of the total insurance market, respectively. 

Nongroup Policies

CBO and JCT estimate that the average premium per person covered (including 

dependents) for new nongroup policies would be about 10 percent to 13 percent 

higher in 2016 than the average premium for nongroup coverage in that same year 

under current law. About half of those enrollees would receive government 

subsidies that would reduce their costs well below the premiums that would be 

charged for such policies under current law. 
Table 1.

Nongroupa Small Groupb Large Groupc

Distribution of Nonelderly Population Insured in These

 Markets Under Proposal 17 13 70

Differences in Average Premiums Relative to Current Law

 Due to:

 Difference in Amount of Insurance Coverage +27 to +30 0 to +3 Negligible

 Difference in Price of a Given Amount of Insurance

 Coverage for a Given Group of Enrollees -7 to -10 -1 to -4 Negligible

 Difference in Types of People with Insurance

 Coverage -7 to -10 -1 to +2 0 to -3

Total Difference Before Accounting for Subsidies +10 to +13 +1 to -2 0 to -3

Effect of Subsidies in Nongroup and Small Group Markets

Share of People Receiving Subsidiesd 57 12 n.a.

For People Receiving Subsidies, Difference in Average

 Premiums Paid After Accounting for Subsidies -56 to -59 -8 to -11 n.a.

Effect of Excise Tax on High-Premium Plans Sponsored

 by Employers

Share of People Who Would Have High-Premium Plans

 Under Current Law n.a. 19

For People Who Would Have High-Premium Plans Under

 Current Law, Difference in Average Premiums Paide n.a. -9 to -12

Memorandum

Number of People Covered Under Proposal (Millions) 32 25 134

Source: Congressional Budget Office and the staff of the Joint Committee on Taxation.

Notes:

a. 

 b.

c.

d.

 

e.

 

 

 5

The effect of the tax includes both the increase in premiums for policies with premiums remaining above the excise tax 

threshold and the reduction in premiums for those choosing plans with lower premiums.

The large group market includes people covered in plans sponsored by firms with more than 50 employees.

The small group market includes people covered in plans sponsored by firms with 50 or fewer employees.

n.a. = not applicable. 

Effect of Senate Proposal on Average Premiums for Health Insurance in 

2016

Percentage, by Market

The nongroup market includes people purchasing coverage individually either in the proposed insurance exchanges or in the 

individual insurance market outside the insurance exchanges.

Premium subsidies in the nongroup market are those available through the exchanges. Premium subsidies in the small group 

market are those stemming from the small business tax credit.
That difference in unsubsidized premiums is the net effect of three changes: 

• Average premiums would be 27 percent to 30 percent higher because a 

greater amount of coverage would be obtained. In particular, the average 

insurance policy in this market would cover a substantially larger share of 

enrollees’ costs for health care (on average) and a slightly wider range of 

benefits. Those expansions would reflect both the minimum level of 

coverage (and related requirements) specified in the proposal and people’s 

decisions to purchase more extensive coverage in response to the structure 

of subsidies. 

• Average premiums would be 7 percent to 10 percent lower because of a 

net reduction in costs that insurers incurred to deliver the same amount of 

insurance coverage to the same group of enrollees. Most of that net 

reduction would stem from the changes in the rules governing the 

nongroup market. 

• Average premiums would be 7 percent to 10 percent lower because of a 

shift in the types of people obtaining coverage. Most of that change would 

stem from an influx of enrollees with below-average spending for health 

care, who would purchase coverage because of the new subsidies to be 

provided and the individual mandate to be imposed.3

 

Average premiums per policy in the nongroup market in 2016 would be roughly 

$5,800 for single policies and $15,200 for family policies under the proposal, 

compared with roughly $5,500 for single policies and $13,100 for family policies 

under current law.4

Those figures indicate what enrollees would pay, on average, not accounting for 

the new federal subsidies. The majority of nongroup enrollees (about 57 percent) 

would receive subsidies via the new insurance exchanges, and those subsidies, on 

average, would cover nearly two-thirds of the total premium, CBO and JCT 

The weighted average of the differences in those amounts 

equals the change of 10 percent to 13 percent in the average premium per person

summarized above, but the percentage increase in the average premium per policy

for family policies is larger and that for single policies is smaller because the 

average number of people covered per family policy is estimated to increase 

under the proposal. The effects on the premiums paid by some individuals and 

families could vary significantly from the average effects on premiums.

3 Although the effects of each factor should be multiplied rather than added in order to generate 

the total effect on premiums, there are also interactions among the three factors that make the sum 

of the individual effects roughly equal to the total effect. The ranges shown for the likely effects of 

each factor and for the likely overall effect on premiums were chosen to reflect the uncertainties 

involved in the estimates; however, the actual effects could fall outside of those ranges. 

4 Because of an error, the figures for average nongroup premiums in 2016 under current law that 

were reported in CBO’s September 22, 2009, letter to Senator Baucus on this subject (which had 

been reported as being about $6,000 for single coverage and about $11,000 for family coverage) 

were not correct. 
estimate. Thus, the amount that subsidized enrollees would pay for nongroup 

coverage would be roughly 56 percent to 59 percent lower, on average, than the 

nongroup premiums charged under current law. Among nongroup enrollees who 

would not receive new subsidies, average premiums would increase by somewhat 

less than the 10 percent to 13 percent difference for the nongroup market as a 

whole because some factors discussed below would have different effects for 

those enrollees than for those receiving subsidies. 

The amount of subsidy received would depend on the enrollee’s income relative 

to the federal poverty level (FPL) according to a specified schedule (see Table 2,

appended).5

The legislation would have much smaller effects on premiums for employmentbased coverage, which would account for about five-sixths of the total health 

insurance market. In the small group market, which is defined in this analysis as 

consisting of employers with 50 or fewer workers, CBO and JCT estimate that the 

change in the average premium per person resulting from the legislation could 

range from an increase of 1 percent to a reduction of 2 percent in 2016 (relative to 

current law).

 Under the proposal, the subsidy levels in each market would be tied 

to the premium of the second cheapest plan providing the “silver” level of 

coverage (that is, paying 70 percent of enrollees’ covered health care costs, on 

average). CBO and JCT have estimated that, in 2016, the average premium 

nationwide for those “reference plans” would be about $5,200 for single coverage 

and about $14,100 for family coverage. The difference between those figures and 

the average nongroup premiums under the proposal that are cited above ($5,800 

and $15,200, respectively) reflects the expectation that many people would opt for 

a plan that was more expensive than the reference plan, to obtain either a higher 

amount of coverage or other valued features (such as a broader network of 

providers or less tightly managed benefits). 

Employment-Based Coverage 

6 In the large group market, which is defined here as consisting of 

employers with more than 50 workers, the legislation would yield an average 

premium per person that is zero to 3 percent lower in 2016 (relative to current 

law). Those overall effects reflect the net impact of many relatively small 

changes, some of which would tend to increase premiums and some of which 

would tend to reduce them (as shown in Table 1).7

5 Table 2 reproduces the table included in Congressional Budget Office, 

 

letter to the Honorable 

Harry Reid providing an analysis of subsidies and payments at different income levels under the 

Patient Protection and Affordable Care Act (November 20, 2009). 

6 Under the proposal, the small group market in 2016 would be defined to include firms with 100 

or fewer employees, but the threshold for the exemption from the penalties imposed on employers 

would be set at 50 full-time employees. Because the proposal would have similar effects on 

premiums for large and small employers, reclassifying firms with 51 to 100 workers as small 

employers for purposes of this analysis would probably have little effect on the overall results, 

though the factors affecting premiums for those firms would be somewhat different. 

7 Because the aggregate amount of premiums for employment-based plans is large, even small 

percentage changes can have noticeable effects on the federal budget through their effects on the 

amount of compensation excluded from taxation because of the tax preference that applies to those 

premiums.
By CBO and JCT’s estimate, the average premium per policy in the small group 

market would be in the vicinity of $7,800 for single policies and $19,200 for 

family policies under the proposal, compared with about $7,800 and $19,300 

under current law. In the large group market, average premiums would be roughly 

$7,300 for single policies and $20,100 for family policies under the proposal, 

compared with about $7,400 and $20,300 under current law.8

The reductions in premiums described above also exclude the effects of the excise 

tax on high-premium insurance policies offered through employers, which would 

have a significant impact on premiums for the affected workers but which would 

affect only a portion of the market in 2016.

 As in the nongroup 

market, the effects on the premiums paid by some people for coverage provided 

through their employer could vary significantly from the average effects on 

premiums, particularly in the small group market. 

Those figures do not include the effects of the small business tax credit on the 

cost of purchasing insurance. A relatively small share (about 12 percent) of 

people with coverage in the small group market would benefit from that credit in 

2016. For those people, the cost of insurance under the proposal would be about 

8 percent to 11 percent lower, on average, compared with that cost under current 

law. 

9 Specifically, an estimated 19 percent 

of workers with employment-based coverage would be affected by the excise tax 

in that year. Those individuals who kept their high-premium policies would pay a 

higher premium than under current law, with the difference in premiums roughly 

equal to the amount of the tax. However, CBO and JCT estimate that most people 

would avoid the cost of the excise tax by enrolling in plans that had lower 

premiums; those reductions would result from choosing plans that either pay a 

smaller share of covered health care costs (which would reduce premiums directly 

as well as indirectly by leading to less use of covered medical services), manage 

benefits more tightly, or cover fewer services.10

8 Those calculations also reflect an expectation that a large share of enrollees in employmentbased plans would be in grandfathered plans throughout the 2010–2019 period.

9 Beginning in 2013, insurance policies with relatively high premiums would be subject to a

40 percent excise tax on the amount by which the premiums exceeded a specified threshold. That

threshold would be set initially at $8,500 for single policies and $23,000 for family policies (with 

certain exceptions); after 2013, those amounts would be indexed to overall inflation plus 

1 percentage point.

10 CBO and JCT assume that, if employers reduce the amount of compensation they provide in the 

form of health insurance (relative to current-law projections), offsetting changes will occur in 

other forms of compensation, which are generally taxable. 

On balance, the average premium 

among the affected workers would be about 9 percent to 12 percent less than 

under current law. Those figures incorporate the other effects on premiums for 

employment-based plans that were summarized above. 
Uncertainty Surrounding These Estimates

The analysis presented here reflects the cost estimate for the legislation that CBO 

and JCT provided on November 18. The same substantial degree of uncertainty 

that surrounds CBO and JCT’s estimates of the impact that the proposal would 

have on insurance coverage rates and the federal budget also accompanies this 

analysis of the proposal’s effects on premiums. Some components of those effects 

are relatively straightforward to estimate, such as the effect of imposing specific 

fees or the effect of a change in the amount of coverage purchased because of 

requirements for minimum coverage; however, estimating effects that depend 

heavily on how enrollees, insurers, employers, or other key actors would 

respond—to such things as the changes in the market rules for nongroup policies 

or the excise tax on high-premium policies—involve greater uncertainty. The 

projections of average premiums in each market under current law are also 

uncertain. 

Differences in the Amount of Coverage Purchased

One key factor contributing to the differences in average insurance premiums 

under the proposal is differences in the average amount of coverage purchased. 

Those differences reflect differences in both the scope of insurance coverage—the 

benefits or services that are included—and in the share of costs for covered 

services paid by the insurer—known as the actuarial value. With other factors 

held equal, insurance policies that cover more benefits or services or have a 

higher actuarial value (by requiring smaller copayments or deductibles) have 

higher premiums, while policies that cover fewer benefits or services or specify 

larger copayments or deductibles have lower premiums. 

The main elements of the legislation that would affect the amount of coverage 

purchased are the requirement that all new policies in the nongroup and small 

group markets cover at least a minimum specified set of benefits; the requirement 

that such policies have a certain minimum actuarial value; and the design of the 

federal subsidies, which would encourage many enrollees in the exchanges to join 

plans with an actuarial value above the required minimum. (The excise tax on 

high-premium plans would also affect the amount of coverage purchased; the 

impact of that tax is discussed in a separate section of this analysis.) Those 

provisions would have a much greater effect on premiums in the nongroup market 

than in the small group market, and they would have no measurable effect on 

premiums in the large group market. 

Specifically, because of the greater actuarial value and broader scope of benefits 

that would be covered by new nongroup policies sold under the legislation, the 

average premium per person for those policies would be an estimated 27 percent 

to 30 percent higher than the average premium for nongroup policies under 

current law (with other factors held constant). The increase in actuarial value 

would push the average premium per person about 18 percent to 21 percent above 

its level under current law, before the increase in enrollees’ use of medical care 

resulting from lower cost sharing is considered; that induced increase, along with 
the greater scope of benefits, would account for the remainder of the overall 

difference. 

In the small group market, the greater actuarial value and broader scope of 

benefits provided for in the legislation would increase the average premium per 

person by about zero to 3 percent (leaving aside the effect of the excise tax on 

high premium plans, which is discussed separately, and holding other factors 

constant). Those requirements would have no noticeable effect on premiums in 

the large group market (again, excluding the effect of the high-premium excise 

tax). 

A Broader Scope of Benefits Would Increase Nongroup Premiums

Under the legislation, new nongroup policies would cover a broader scope of 

benefits than are projected to be covered by such policies, on average, under 

current law. In particular, the legislation would require all new nongroup policies 

to cover a specified set of “essential health benefits,” which would be further 

delineated by the Secretary of Health and Human Services (HHS) and would be 

required to match the scope of benefits provided by typical employment-based 

plans. As a result, new nongroup policies would cover certain services that are 

often not covered by nongroup policies under current law, such as maternity care, 

prescription drugs, and mental health and substance abuse treatment. Moreover, 

nongroup insurers would be prohibited from denying coverage for preexisting 

conditions, so premiums would have to increase to cover the resulting costs. 

An additional consideration relates to state-mandated benefits. Under the 

proposal, states that mandated coverage of benefits beyond those required by the 

new federal rules would have to pay any costs of subsidizing those additional 

benefits. CBO and JCT assumed that, to the extent that states continued to 

mandate such benefits, they would make the resulting payments directly to 

insurers—so those costs would not be reflected in the premiums that enrollees 

observed when shopping for insurance in the exchanges. The reduction in 

premiums (relative to those under current law) resulting from this provision 

would be relatively small because many benefits that states mandate are already 

provided by typical employment-based plans and thus would be included in the 

“essential health benefits” that the proposal would require nongroup policies to 

cover.

11

11 For an additional discussion of the average incremental cost of state-mandated benefits, see 

Congressional Budget Office, 

 

The legislation would further require that policies sold in the small group market 

cover the same minimum set of benefits as those sold in the nongroup market. 

That requirement would have relatively little effect on premiums in the small 

group market, however, because most policies sold in that market already cover 

those services and would continue to cover them under current law. Further, small 

group policies that are maintained continuously would be grandfathered under the 

proposal. 

Key Issues in Analyzing Major Health Insurance Proposals

(December 2008), p. 61. 
A Greater Actuarial Value Would Increase Nongroup Premiums

Under the legislation, new nongroup policies purchased after 2013 would have a 

substantially greater actuarial value, on average, than nongroup policies 

purchased under current law. Policies sold in the nongroup market are expected to 

have an average actuarial value of about 60 percent under current law, and new 

nongroup policies would be required to have an actuarial value of at least 

60 percent (the level specified for the “bronze” plan) under the proposal. 

However, federal premium subsidies would be tied to a “reference premium” 

equal to the premium of the second lowest cost “silver” plan, which would have 

an actuarial value of 70 percent, and plans would also be available with actuarial 

values of 80 percent (“gold” plan) and 90 percent (“platinum” plan).12

People who received premium subsidies would be able to buy a plan whose 

premium exceeded the reference premium, although they would have to pay the 

entire additional cost of that more expensive plan. With the expected enrollment 

choices of people with subsidies and people without subsidies taken into account, 

the average actuarial value of nongroup policies purchased is estimated to be 

roughly 72 percent. The increases in actuarial value relative to that under current 

law would increase the premiums for those policies, because the policies would 

cover a greater proportion of their enrollees’ spending on medical care. Of course, 

the increases in actuarial value would also reduce enrollees’ expected out-ofpocket spending on copayments and deductibles, particularly for enrollees who 

used more medical services than average. The reduced cost sharing would lead to 

greater use of medical services, which would tend to push premiums up further.

 

13

Among nongroup enrollees who would not receive new subsidies, the average 

actuarial value of their coverage would not differ as sharply from the average for 

the nongroup market under current law. Some would choose to enroll in a “young 

invincibles” plan to be offered under the proposal; that plan would have relatively 

high deductibles and a relatively low actuarial value (estimated to be less than 

50 percent), and the premium would be correspondingly low. (That plan would 

generally not be attractive to individuals who could receive premium subsidies for 

more extensive coverage.) Moreover, if they wanted to, current policyholders in 

the nongroup market would be allowed to keep their policy with no changes, and 

the premiums for those policies would probably not differ substantially from 

current-law levels. But because of relatively high turnover in that market (as well 

as the incentives for many enrollees to purchase a new policy in order to obtain 

 

12 Enrollees with income below 200 percent of the FPL would receive subsidies for cost sharing to 

increase the overall actuarial value of their coverage to either 80 percent or 90 percent. However, 

the plan in which they enrolled would have a premium that reflects an actuarial value of 

70 percent, and that premium was used in the calculation of the average premium under the 

proposal. 

13 The increase in spending for health care that would arise when uninsured people gained 

coverage is accounted for separately; see the discussion below. For a discussion of the impact that 

cost sharing has on spending for health care and related considerations, see Congressional Budget 

Office, Key Issues, pp. 61–62, 71–76, and 110–112. 
subsidies), CBO and JCT estimate that relatively few nongroup policies would 

remain grandfathered by 2016. 

Effects on Premiums for Employment-Based Plans Would be Much Smaller

The legislation would impose the same minimum actuarial value for new policies 

in the small group market as in the nongroup market. That requirement would 

have a much smaller effect on premiums in the small group market, however, 

because the great majority of policies sold in that market under current law have 

an actuarial value of more than 60 percent. Essentially all large group plans have 

an actuarial value above 60 percent, so the effect on premiums in that market 

would be negligible. In sum, the greater actuarial value and broader scope of 

benefits in the legislation would increase the average premium per person in the 

small group market by about zero to 3 percent (with other factors held constant). 

Those requirements would have no significant effect on premiums in the large 

group market. 

Differences in the Price of a Given Amount of Coverage 

for a Given Population

A second broad category of differences in premiums encompasses factors that 

reflect an “apples-to-apples” comparison of the average price of providing 

equivalent insurance coverage for an equivalent population under the legislation 

and under current law.14 The main provisions of the legislation that fall into this 

category are the new rules for the insurance market, including the establishment 

of exchanges and availability of a public plan through those exchanges, which 

would reduce insurers’ administrative costs and increase slightly the degree of 

competition among insurers, and several new fees that would be imposed on the 

health sector, which would tend to raise insurance premiums.15

Some observers have argued that private insurance premiums would also be 

affected by changes in the extent of “cost shifting”—a process in which lower 

rates paid to providers for some patients (such as uninsured people or enrollees in 

government insurance programs) lead to higher payments for others (such as 

privately insured individuals). However, the effect of the proposal on premiums 

through changes in cost shifting seems likely to be quite small because the 

proposal has opposing effects on different potential sources of cost shifting, and 

 

14 In this description, “equivalent coverage” means policies that have the same scope of benefits 

and cost-sharing requirements. The benefits received by enrollees in plans with equivalent 

coverage also depend on factors such as the benefit management being used and the size and 

composition of the provider network.

15 The effect of the excise tax on health insurance plans with relatively high premiums is discussed 

separately, below. Also, to focus on permanent elements of the legislation, this analysis does not 

include the effect of the reinsurance that would be provided for new nongroup plans between 2014 

and 2016 only. Those payments would be financed by a fee levied on all private insurers, so the 

effects would differ by market but the overall impact on premiums would be modest. 
the total amount of cost shifting in the current health care system appears to be 

modest relative to the overall cost of health insurance. 

CBO and JCT estimate that the elements of the legislation that would change the 

price of providing a given amount of coverage for a given population would, on 

net, reduce the average premium per person for nongroup coverage in 2016 by 

about 7 percent to 10 percent relative to the amount under current law. Those 

elements of the legislation would reduce the average premium per person in the 

small group market by about 1 percent to 4 percent and would not have a 

measurable impact on premiums in the large group market. 

New Market Rules Would Reduce Administrative Costs

Compared with plans that would be available in the nongroup market under 

current law, nongroup policies under the proposal would have lower 

administrative costs, largely because of the new market rules:16

• The influx of new enrollees in response to the individual mandate and new 

subsidies—combined with the creation of new insurance exchanges—

would create larger purchasing pools that would achieve some economies 

of scale. 

• Administrative costs would be reduced by provisions that require some 

standardization of benefits—for example, by limiting variation in the 

types of policies that could be offered and prohibiting “riders” to 

insurance policies (which are amendments to a policy’s terms, such as 

coverage exclusions for preexisting conditions); insurers incur 

administrative costs to implement those exclusions.

• Administrative costs would be reduced slightly by the general prohibition 

on medical underwriting, which is the practice of varying premiums or 

coverage terms to reflect the applicant’s health status; nongroup insurers 

incur some administrative costs to implement underwriting. 

• Partly offsetting those reductions in administrative costs would be a 

surcharge that exchange plans would have to pay under the proposal to 

cover the operating costs of the exchanges.

In the small group market, some employers would purchase coverage for their 

workers through the exchanges.17

16 Those market rules would also affect premiums by changing the scope of coverage provided and 

the types of people who obtain coverage, as discussed in other sections. 

17 In 2016, states would have to give all employers with 100 or fewer employees the option to 

purchase coverage through the exchanges. States could give larger employers that option starting 

in 2017. However, CBO and JCT expect that few large firms would take that option if offered 

because their administrative costs would generally be lower than those of nongroup policies that 

would be available in the exchanges. 

 Such policies would have lower administrative 

costs, on average, than the policies those firms would buy under current law, 
particularly for very small firms.18

One other feature of the proposal would also put a modicum of downward 

pressure on average premiums in the exchanges—namely, the provisions allowing 

exchange administrators to act as “prudent purchasers” when reviewing and 

approving the proposed premiums of potential insurers.

The primary sources of administrative cost 

savings for small employers would be the economies of scale and relative 

standardization of benefits in the exchanges noted above; currently, the use of 

exclusions for preexisting conditions is rare in the small group market, so the 

rules affecting coverage of those conditions would have only a small effect on 

administrative costs in that market. 

In addition, the administrative simplification provisions of the legislation would 

require the Secretary of HHS to adopt and regularly update standards for 

electronic administrative transactions such as electronic funds transfers, claims 

management processes, and eligibility verification. In CBO and JCT’s estimation, 

those provisions would reduce administrative costs for insurers and providers, 

which would result in a modest reduction in premiums in all three broad insurance 

markets.

Increased Competition Would Slightly Reduce Premiums in the Nongroup 

Market 

The exchanges would enhance competition among insurers in the nongroup 

market by providing a centralized marketplace in which consumers could 

compare the premiums of relatively standardized insurance products. The 

additional competition would slightly reduce average premiums in the exchanges 

by encouraging consumers to enroll in lower-cost plans and by encouraging plans 

to keep their premiums low in order to attract enrollees. In particular, insurers 

probably would adopt slightly stronger benefit management procedures to restrain 

spending or would slightly reduce the rates they pay providers. Those small 

employers that purchased coverage through the exchanges would see similar 

reductions in premiums because of the increased competition among plans.

19

CBO and JCT’s analysis of exchange premiums has also taken into account the 

availability of a public plan through those exchanges in some states. Premiums for 

the public plan as structured under the proposal would typically be somewhat 

 Although the 

administrators’ authority would be limited, evidence from the implementation of 

an exchange system in Massachusetts suggests that the existence of such authority 

would tend to reduce premiums slightly. 

18 Among small employers, administrative costs decline as a share of premiums as the size of the 

firm increases. Thus, the smallest employers would be most likely to see lower administrative 

costs for policies in the exchanges than what they would be charged under current law.

19 Specifically, the legislation would require insurers seeking to participate in the exchanges to 

submit a justification for any premium increase prior to implementing it; the legislation also would 

give exchanges the authority to take that information into consideration when determining whether 

to make a plan available through the exchanges.
higher than the average premiums of private plans offered in the exchanges.20

• A public plan as structured in the proposal would probably attract a 

substantial number of enrollees, in part because it would include a broad 

network of providers and would be likely to engage in only limited 

management of its health care benefits. (CBO and JCT estimate that total 

enrollment in the public plan would be about 3 million to 4 million in 

2016.) As a result, it would add some competitive pressure in the 

exchanges in areas that are currently served by a limited number of private 

insurers, thereby lowering private premiums to a small degree. 

By 

itself, that development would tend to increase average premiums in the 

exchanges—but a public plan would probably tend to reduce slightly the 

premiums of the private plans against which it is competing, for two reasons: 

• A public plan is also apt to attract enrollees who are less healthy than 

average (again, because it would include a broad network of providers and 

would probably engage in limited management of benefits). Although the 

payments that all plans in the exchanges receive would be adjusted to 

account for differences in the health of their enrollees, the methods used to 

make such adjustments are imperfect. As a result, the higher costs of those 

less healthy enrollees in the public plan would probably be offset partially 

but not entirely; the rest of the added costs would have to be reflected in 

the public plan’s premiums. Correspondingly, the costs and premiums of 

competing private plans would, on average, be slightly lower than if no 

public plan was available. 

Those factors would reduce the premiums of private plans in the exchanges to a 

small degree, but the effect on the average premium in the exchanges would be 

offset by the higher premium of the public plan itself. On balance, therefore, the 

provisions regarding a public plan would not have a substantial effect on the 

average premiums paid in the exchanges.21

The legislation would impose several new fees on firms in the health sector. New 

fees would be imposed on providers of health insurance and on manufacturers and 

importers of medical devices. Both of those fees would be largely passed through 

 

New Fees Would Increase Premiums Slightly

20 Under the proposal, the public plan would negotiate payment rates with providers. CBO and 

JCT anticipate that those rates would be similar to the rates paid by private insurers participating 

in the exchanges. The public plan would have lower administrative costs than private plans, on 

average, but would probably engage in less benefit management and attract a less healthy pool of 

enrollees (the effects of which would be offset only partially by the risk adjustment procedures 

that would apply to all plans operating in the exchanges). On net, those factors would result in the 

public plan’s premiums being somewhat higher than the average premiums of private plans in the 

exchanges.

21 The presence of the public plan would have a more noticeable effect on federal subsidies 

because it would exert some downward pressure on the premiums of the lower-cost plans to which 

those subsidies are tied.
to consumers in the form of higher premiums for private coverage. Self-insured 

plans would be mostly exempt from the fee on health insurance providers, and 

since large firms are more likely to self-insure, that fee would result in smaller 

percentage increases in average premiums for large firms than it would for small 

firms and for nongroup coverage.22

• On the one hand, the legislation would reduce payments to hospitals and 

certain other providers under Medicare.

 

The legislation also would impose a fee on manufacturers and importers of brandname prescription drugs, which would be allocated among firms on the basis of 

drug sales to government programs. Because that fee would not impose an 

additional cost for drugs sold in the private market, CBO and JCT estimate that it 

would not result in measurably higher premiums for private coverage. (The 

legislation would also impose an excise tax on high-premium insurance policies 

provided by employers; that tax is discussed separately below because it would 

affect only a portion of the insurance market.) 

Effects Related to Cost Shifting Would Be Minimal

Some observers have predicted that the proposal (and similar initiatives) would 

affect premiums for private insurance plans by changing the extent of cost 

shifting. The legislation would have opposing effects on the pressures for cost 

shifting: 

23 In addition, it would 

significantly increase enrollment in Medicaid, which pays providers 

appreciably lower rates than private insurers do. Those changes could 

cause premiums for private coverage to increase. 

• On the other hand, the legislation would ultimately reduce the uninsured 

population by more than half, which would sharply reduce the amount of 

uncompensated or undercompensated care provided to people who lack 

health insurance. One recent estimate indicates that hospitals provided 

about $35 billion in such care in 2008—an amount that would grow under 

current law but would be expected to decline considerably under the 

legislation.24

22 The fee would be levied on third-party administrators of self-insured plans in proportion to 

twice their administrative spending, which is substantially less than the total premiums that would 

be the base for the levy on plans purchased from insurers. Government health insurance plans such 

as Medicare and Medicaid would be exempt from that fee, but any public plan offered in the 

exchanges would be subject to it. 

23 The legislation would reduce Medicare payment updates for most services in the fee-for-service 

sector (other than physicians’ services) and reduce Medicare and Medicaid payments to hospitals 

that serve large numbers of low-income patients, known as “disproportionate share” (DSH) 

hospitals. 

 That change could cause premiums for private coverage to 

decrease.

24 Recent evidence indicates that physicians collectively provide much smaller amounts of 

uncompensated or undercompensated care than hospitals. See Jonathan Gruber and David 

Rodriguez, “How Much Uncompensated care Do Doctors Provide?” Journal of Health 

Economics, vol. 26 (2007), pp. 1151–1169.
The net effect of those opposing pressures would depend on their relative 

magnitude and also on the degree to which costs are shifted. CBO expects that the 

magnitude of those opposing pressures would be about the same. Moreover, 

CBO’s assessment of the evidence is that a small amount of cost shifting occurs 

but that it is not as widespread or extensive as is commonly assumed. The fact 

that private insurers pay providers higher rates, on average, than Medicare and 

Medicaid is not evidence that cost shifting occurs. For cost shifting to occur, a 

decline in the rates paid by some payers would have to lead to an increase in the 

rates paid by others; thus, for cost shifting from reductions in rates paid by 

Medicare to occur, providers would have to have initially been charging private 

insurers lower rates than they could have. Well-designed studies have found that a 

relatively small share of the changes in payment rates for government programs is 

passed on to private payment rates, and the impact of changes in uncompensated 

care is likely to be similar.25

25 For a more extensive discussion of cost shifting, see Congressional Budget Office,

Overall, therefore, CBO’s assessment is that the 

legislation would have minimal effects on private-sector premiums via cost 

shifting. 

Differences in the Types of People Who Obtain Coverage 

in Different Insurance Markets

The third broad factor that would affect average insurance premiums is 

differences in the types of people who obtain coverage in different insurance 

markets. If more people who are relatively healthy or relatively disinclined to use 

medical care participate in a given insurance market, then the average spending 

on medical services provided in that market will be lower, and the average 

premium in that market will be lower, with other factors held equal; conversely, if 

more people who are relatively unhealthy or are relatively inclined to use medical 

care participate in a given insurance market, the average spending on medical 

services and the average premium for that market will be higher, all else equal. 

Thus, a shift of less healthy people from one insurance market to another will tend 

to lower premiums in the “source” market and raise them in the “destination” 

market. Likewise, the number and types of people who would be uninsured under 

current law but would become insured under the proposal—and the effects of 

gaining coverage on their use of health care—would affect the average premiums 

charged in the markets in which they buy insurance. 

Overall, CBO and JCT estimate that an influx of new enrollees into the nongroup 

market would yield an average premium per person in that market that is 

7 percent to 10 percent lower than the average premium projected under current 

law. Changes in the types of people covered in the small group and large group 

markets would have much smaller effects on premiums, yielding a change in the 

small group market that could range from a decrease of 1 percent to an increase of 

2 percent, and a decrease in the large group market of zero to 3 percent. 

Key Issues,

pp. 112–116. 
Key Characteristics of the Insured and Uninsured Under Current Law

To assess the likely medical spending of prospective new enrollees in different 

insurance markets, it is useful to review some key characteristics of the insured 

and uninsured populations under current law. CBO and JCT’s assessment of those 

characteristics is based on data from representative surveys of the U.S. population 

that examine people’s health insurance coverage, health status, and use of health 

care.26

One other factor that would not be the same—and that would tend to accentuate 

this projected difference in utilization—is how much medical care the uninsured 

would use once they did gain coverage: They would tend to consume less medical 

care than current nongroup enrollees, even after adjusting for their age and health. 

CBO’s review of relevant studies concluded that insuring the currently uninsured 

under a typical employment-based plan would generate an increase of 25 percent 

to 60 percent in their average utilization of care. (That average increase in 

utilization and spending would arise even though some newly insured people 

 This discussion addresses the projected distribution of the population in 

2016, using as a reference point the 162 million people expected to be covered by 

employment-based insurance in that year under current law. 

About 14 million people are expected to be covered by nongroup policies in 2016 

under current law. Enrollees in nongroup coverage would be about 3 years older, 

on average, than enrollees in employment-based insurance—which would tend to 

raise their use of medical care—but would be slightly healthier, on average, at any 

given age—which would tend to lower their use of care. On balance, the average 

spending on medical care of nongroup enrollees would be somewhat greater than 

that of enrollees in employment-based insurance if they were enrolled in 

insurance plans with the same amount and structure of coverage. 

By contrast, the 52 million people who are expected to be uninsured under current 

law in 2016 would be about 2 years younger, on average, than the population 

covered by employment-based plans and thus would be about 5 years younger 

than nongroup enrollees, on average. At any given age, the average health of the 

uninsured population would be somewhat worse than the average health of people 

with nongroup insurance. A large share of the uninsured population, however, 

would not be eligible to obtain subsidized coverage via the exchanges; instead, 

those with income below 133 percent of the FPL would generally be eligible for 

free coverage through Medicaid. That low-income group is relatively unhealthy, 

and once they are removed from the comparison, the disparity in health between 

the remaining uninsured population and current-law enrollees in the nongroup 

market essentially disappears. Therefore, considering only their age and their 

health status and holding other factors constant, the expected use of medical care 

by uninsured people who would be eligible for subsidized coverage in the 

exchanges would be less than that of current nongroup enrollees. 

26 For additional information on the data sources used and the methodology involved, see

Congressional Budget Office, CBO’s Health Insurance Simulation Model: A Technical 

Description, Background Paper (October 2007). 
would avoid expensive treatments by getting care sooner, before their illness 

progressed, or would receive services in a less expensive setting.) Despite that

substantial increase in utilization, their use of care would still be below that of 

people with similar characteristics who are currently insured.

27

• The legislation would establish an annual open enrollment period for new 

nongroup policies similar to that typically used by employers, which 

would limit opportunities for people who are healthy to wait until an 

illness or other health problem arose before enrolling. 

That remaining

difference in average utilization probably reflects various differences between the 

insured and uninsured aside from differences in their age and health status, and 

the effect of obtaining insurance could be much larger for some people and much 

smaller for others. 

A Limited Amount of Adverse Selection Would Occur in New Nongroup 

Plans

The preceding discussion examined the types of people who would receive 

coverage in different markets under current law or would be eligible to receive 

coverage in different markets under the proposal. However, the effects of the 

proposal on the types of enrollees in each market would depend ultimately on 

who chose to receive coverage in those markets—with the most significant 

changes coming in the nongroup market. 

Under current laws governing the nongroup market, insurers in most states do not 

have to accept all applicants, may vary premiums widely to reflect differences in 

enrollees’ health status and age, and may exclude coverage of preexisting medical 

conditions. By themselves, the proposal’s provisions changing those rules would 

make nongroup coverage more attractive to people who are older and who expect 

to be heavier users of medical care and less attractive to people who are younger 

and expect to use less medical care. Therefore, in the absence of other changes to 

the insurance market, people who are older and more likely to use medical care 

would be more likely to enroll in nongroup plans—a phenomenon known as 

adverse selection. Such selection would tend to increase premiums in the 

exchanges relative to nongroup premiums under current law. 

However, several other provisions of the proposal would tend to mitigate that 

adverse selection: 

• The substantial premium subsidies available in the exchanges would 

encourage the enrollment of a broad range of people. For people whose 

27 CBO estimates that the uninsured currently use about 60 percent as much medical care as 

insured people, taking into account differences between the groups in their average age and health 

status. Providing all of the uninsured with health insurance coverage equivalent to a typical 

employment-based plan would thus be estimated to increase their demand for medical services to a 

level that is between 75 percent and 95 percent of the level of similar people who are currently 

insured (corresponding to an increase of 25 percent and 60 percent, respectively). For additional 

discussion of these estimates, see Congressional Budget Office, Key Issues, pp. 71–76.
income was below 200 percent of the FPL, those subsidies would average 

around 80 percent. 

• The requirement that people have insurance would also encourage a broad 

range of people to take up coverage in the exchanges. CBO and JCT 

expect that some people would obtain coverage because of the penalties 

that would be levied for not complying with the mandate (which would be 

$750 per adult and $375 per child in 2016) and that others would obtain 

coverage simply because of the existence of a mandate; those expectations 

are based in part on people’s compliance with other types of mandates.28

• The premiums that most nongroup enrollees pay would be determined on 

the basis of their income, so higher premiums resulting from adverse 

selection would not translate into higher amounts paid by those enrollees 

(though federal subsidy payments would have to rise to make up the 

difference). That arrangement would dampen the chances that a cycle of 

rising premiums and declining enrollment would ensue. 

• During the 2014–2016 period, as the mandate penalties were being phased 

in and other provisions were in the initial stages of implementation, the 

legislation would provide reinsurance payments to insurers that ended up 

with particularly high-cost enrollees. That reinsurance system (funded by 

an assessment on all insurers) would also limit the impact of adverse 

selection on insurance premiums. 

On balance, CBO and JCT expect that some adverse selection into nongroup 

plans would arise, especially among people who received relatively small 

subsidies. However, the extent of such adverse selection is likely to be limited, 

and many nongroup enrollees would be in fairly good health. 

The Characteristics of Enrollees in Nongroup Plans Would Be Substantially 

Different Than Those Under Current Law 

CBO and JCT estimate that about 32 million people would obtain coverage in the 

nongroup market in 2016 under the proposal, consisting of about 23 million who 

would obtain coverage through the insurance exchanges and about 9 million who 

would obtain coverage outside the exchanges. Relative to the situation under 

current law, with about 14 million people buying nongroup coverage, the different 

mix of enrollees would yield average premiums per person in that market that are 

about 7 percent to 10 percent lower. Some people who would enroll in nongroup 

coverage under the proposal would be uninsured under current law, some would 

have employment-based coverage, and some would have nongroup coverage 

under current law as well. To estimate how the different mix of enrollees in the 

nongroup market would affect premiums, it is useful to examine enrollment 

patterns and expected medical costs for each of those three groups. 

28 For a discussion of compliance with mandates, see Congressional Budget Office, Key Issues,

pp. 48–54.
First, CBO and JCT estimate that about a third of the nongroup enrollees 

estimated under the proposal in 2016 would be uninsured under current law. As 

discussed above, the pool of people who would be eligible for the exchanges and 

would otherwise be uninsured would be—relative to those who have nongroup 

coverage under current law—younger, roughly as healthy at any given age, and 

likely to use less medical care (given their age and health status). At the same 

time, the adverse selection discussed above means that the members of that pool 

who would choose to purchase coverage would be less healthy, on average, than 

all of the members of the pool together, particularly among those who would 

receive limited subsidies. On balance, CBO and JCT estimate that the enrollees 

who would be uninsured under current law would use significantly less medical 

care, on average, than individuals enrolled in nongroup coverage under current 

law (with other factors held constant).29

29 People who report that they are in either fair or poor health tend to use much more health care 

than the average person, and otherwise uninsured people in fair or poor health would be more 

likely to enroll in nongroup coverage. Even so, they would constitute less than 10 percent of the 

otherwise uninsured group enrolling in nongroup coverage. 

Second, CBO and JCT estimate that about a fifth of nongroup enrollees under the 

proposal in 2016 would have employment-based coverage under current law. 

Most of those people would not have an offer of employment-based coverage 

under the proposal; others would have such an offer but it would be deemed 

unaffordable, so they would be eligible to obtain subsidies through the exchanges. 

On average, those enrollees would be older and in poorer health than nongroup 

enrollees under current law, because the proposal’s changes in the nongroup 

market would make that market more appealing to those types of people. The 

inflow of those people into the nongroup market would thus tend to increase 

average medical spending and average premiums per person in that market to 

some degree. 

Third, CBO and JCT estimate that nearly half of the people enrolling in nongroup 

coverage under the proposal would have nongroup coverage under current law as 

well. Holding other factors constant, those enrollees would obviously not change 

average medical spending or premiums in the nongroup market relative to the 

levels under current law. 

In the comparison of nongroup premiums under the proposal with those under 

current law, the differences discussed in this section would vary considerably 

among people. In general, the proposal would tend to increase premiums for 

people who are young and relatively healthy and decrease premiums for those 

who are older and relatively unhealthy. However, to fully evaluate the 

implications of the proposal for different types of people, it is necessary to include 

the effects of the subsidies that are discussed below. 

 
The Characteristics of Enrollees in Employment-Based Plans Would Be 

Slightly Different Under the Proposal

CBO and JCT estimate that changes in the characteristics of people with 

insurance in the small group market would yield a change in the average 

premiums per person in that market that could range from a decrease of 1 percent 

to an increase of 2 percent. That difference would be the net effect of three 

principal factors:

• Under the legislation, new insurance policies sold in the small group 

market would be subject to the same rating rules as policies sold in the 

nongroup market. In particular, insurers in the small group market could 

not vary premiums to reflect the health of firms’ workers. That change 

would reduce premiums for small firms whose employees are in relatively 

poor health—leading some of those firms that would not offer insurance 

under current law to do so under the proposal—and increase premiums for 

small firms whose employees are in relatively good health—leading some 

of those firms who would offer coverage under current law not to do so 

under the proposal. Consequently, the people covered in the small group 

market would be in somewhat worse health, on average, under the 

proposal than under current law, which would tend to increase average 

premiums in that market.30 

• The individual mandate included in the proposal would induce some 

uninsured workers who would decline the coverage offered by their 

employers under current law to purchase such coverage. That change 

would reduce average premiums by a modest amount, because the people 

who would become insured would be in better health, on average, than 

their coworkers who would purchase insurance under current law.

• The individual mandate (and the small business tax credit) would also 

increase slightly the percentage of small firms that offer coverage. Those 

firms are likely to have healthier workers, on average, than small firms 

that would offer coverage under current law, largely reflecting the relative 

youth of workers at firms that would not offer coverage under current law 

compared with workers at firms that would. Consequently, their inclusion 

in the small group market would reduce average premiums in that market 

by a small amount. 

30 That effect would be muted by the proposal’s grandfathering provisions, which would allow 

insurers to continue to set premiums according to current rules as long as an employer’s policy 

was continuously maintained; however, that option would also be most attractive to employers 

with relatively healthy workers and least attractive to employers with relatively unhealthy 

workers. The increased attractiveness of the nongroup market for older and less healthy workers 

would also temper the effect of the new rating rules on average premiums in the small group 

market, because some of those workers would shift from employment-based to nongroup 

coverage.
In contrast, CBO and JCT estimate that changes in the characteristics of people 

with insurance in the large group market would reduce average premiums per 

person in that market by about zero to 3 percent. One factor that would contribute 

to that difference is the shift of some less healthy workers to the nongroup market, 

as noted above. Another factor is the individual mandate, which would encourage 

younger and relatively healthy workers who might otherwise not enroll in their 

employers’ plans to do so. Other factors that would slightly increase coverage of 

relatively healthy individuals under large group plans are the provisions of the 

legislation that would require large employers to automatically enroll new 

employees in an insurance plan and to offer coverage for unmarried dependents 

up to age 26. The proposal’s restrictions on variation in premiums would have 

minimal effect on premiums in the large group market; many large firms selfinsure and thus would not be affected by those changes, and firms that might be 

adversely affected could be grandfathered and thus avoid the restrictions. 

Effects of the Proposed Exchange Subsidies and Small 

Business Tax Credit 

Under the proposal, the government would subsidize the purchase of nongroup 

insurance through the exchanges for individuals and families with income 

between 133 percent and 400 percent of the FPL, and it would provide tax credits 

to certain small businesses that obtained health insurance for their employees. 

Although the preceding analysis accounted for the effects of those subsidies on 

the number and types of people who would obtain coverage and on the amount of 

coverage that enrollees would obtain, the direct effect of the subsidies on 

enrollees’ payments for coverage were not included in the figures presented above 

because the objective there was to assess the impact of the legislation on the 

average premiums paid to insurers. This section builds on the earlier calculations 

by quantifying how the exchange subsidies and tax credits would directly affect 

the average premiums paid by individuals and families who would receive that 

government assistance.

Premium subsidies in the exchanges would be tied to the premium of the second 

cheapest silver plan (which would have an actuarial value of 70 percent). The 

national average premium for that reference plan in 2016 is estimated to be about 

$5,200 for single coverage and about $14,100 for family coverage (see Table 2). 

The national average premium for all nongroup plans would be higher—about 

$5,800 for single coverage and about $15,200 for family coverage—because 

many people would buy more expensive plans. 

Under the proposal, the maximum share of income that enrollees would have to 

pay for the reference plan would vary depending on their income relative to the 

FPL, as follows: 

• For enrollees with income below 133 percent of the FPL, the maximum 

share of income paid for that plan would be 2.0 percent in 2014; for 

enrollees with income between 133 percent and 300 percent of the FPL, 
that maximum share of income would vary linearly from about 4 percent 

of income to 9.8 percent of income in 2014; and for enrollees with income 

between 300 percent and 400 percent of the FPL, that maximum share of 

income would equal 9.8 percent. 

• After 2014, those income-based caps would all be indexed so that the 

share of the premiums that enrollees (in each income band) paid would be 

maintained over time. As a result, the income-based caps would gradually 

become higher over time; for 2016, they are estimated to range from about 

2.1 percent to about 10.2 percent. 

• Enrollees with income below 200 percent of the FPL would also be given 

cost-sharing subsidies to raise the actuarial value of their coverage to 

specified levels: 90 percent for those with income below 150 percent of 

the FPL, and 80 percent for those with income between 150 percent and 

200 percent of the FPL. 

• Enrollees with income above 400 percent of the FPL would not be eligible 

for exchange subsidies, and enrollees with income below that level whose 

premiums for the reference plan turned out to be less than their incomebased cap also would not receive subsidies.

CBO and JCT estimated that roughly 23 million people would purchase their own 

coverage through the exchanges in 2016 and that roughly 5 million of those 

people would not receive exchange subsidies.31

The government would also provide some subsidies for the purchase of health 

insurance in the form of tax credits to small firms. Under certain circumstances, 

firms with relatively few employees and relatively low average wages would be 

eligible for tax credits to cover up to half of their contributions toward insurance 

premiums. Of the people who would receive small group coverage in 2016 under 

the proposal, roughly 12 percent would benefit from those credits, CBO and JCT 

estimate. For the people who would benefit from those credits, the credits would 

 Therefore, of the 32 million 

people who would have nongroup coverage in 2016 under the proposal (including 

those purchased inside and outside the exchanges), about 18 million, or 

57 percent, would receive exchange subsidies. For the people who received 

subsidies, those subsidies would, on average, cover nearly two-thirds of the 

premiums for their policies in 2016. Putting together the subsidies and the higher 

level of premiums paid to insurers yields a net reduction in average premiums 

paid by individuals and families in the nongroup market—for those receiving 

subsidies—of 56 percent to 59 percent relative to the amounts paid under current 

law. People in lower income ranges would generally experience greater 

reductions in premiums paid, and people in higher income ranges who receive 

subsidies would experience smaller reductions or net increases in premiums paid. 

31 See Congressional Budget Office, cost estimate for the amendment in the nature of a substitute 

to H.R. 3590, the Patient Protection and Affordable Care Act (November 18, 2009), Table 3. 
tend to reduce the net cost of insurance to workers relative to the premiums paid 

to insurers by a little less than 10 percent, on average, in 2016. In the small group 

market, the other factors that were the focus of earlier sections of this analysis 

would cause premiums paid to insurers to change by an amount that could range 

from an increase of 1 percent to a reduction of 2 percent (compared to current 

law). Putting together the tax credits and the change in premiums paid to insurers 

yields a net reduction in the cost of insurance to workers in the small group 

market—for those benefiting from tax credits—of 8 percent to 11 percent relative 

to that under current law. 

Effects of the Excise Tax on High-Premium Insurance 

Plans

The legislation would impose an excise tax on employment-based policies whose 

total premium (including the amounts paid by both the employer and the 

employee) exceeded a specified threshold. The tax on such policies would be 

40 percent of the amount by which the premium exceeded the threshold. In 

general, that threshold would be set at $8,500 for single policies and $23,000 for 

family policies in 2013 (the first year in which the tax would be levied), although 

a number of temporary and permanent exceptions would apply. After 2013, those 

dollar amounts would be indexed to overall inflation plus 1 percentage point. 

CBO and JCT estimate that, under current law, about 19 percent of employmentbased policies would have premiums that exceeded the threshold in 2016. 

(Because health insurance premiums under current law are projected to increase 

more rapidly than the threshold, the percentage of policies with premiums under 

current law that would exceed the threshold would increase over time.) For 

policies whose premiums remained above the threshold, the tax would probably 

be passed through as a roughly corresponding increase in premiums. However, 

most employers would probably respond to the tax by offering policies with 

premiums at or below the threshold; CBO and JCT expect that the majority of the 

affected workers would enroll in one of those plans with lower premiums. Plans 

could achieve lower premiums through some combination of greater cost sharing 

(which would lower premiums directly and also lower them indirectly by leading 

to less use of medical services), more stringent benefit management, or coverage 

of fewer services.

 

Thus, people who remained in high-premium plans would pay higher premiums 

under the excise tax than under current law, and people who shifted to lowerpremium plans would pay lower premiums under the excise tax than under current 

law—with other factors held constant. On net, CBO and JCT estimate that the 

excise tax and the resulting behavioral changes, incorporating the changes in 

premiums for employer-sponsored insurance that were discussed earlier in this 

analysis, would reduce average premiums among the 19 percent of policies 

affected by the tax by about 9 percent to 12 percent in 2016. 
Other Potential Effects on Premiums

The proposal could have some broader or longer-term effects on the level or 

growth rate of health care spending and health insurance premiums. Such effects 

could arise from several sources, some of which would tend to raise premiums 

relative to the figures cited above, and others of which would tend to lower them. 

The uncertainties involved in assessing the magnitude of those effects are 

especially great. However, in CBO and JCT’s judgment, those effects are unlikely 

to be large—especially by 2016, which is the focus of this analysis. 

On the one hand, research by Amy Finkelstein suggests that expanded insurance 

coverage could have broader effects on the use of health care services than are 

captured by focusing on changes for the previously uninsured.32

On the other hand, the proposal includes numerous provisions that would 

encourage the development and dissemination of less costly ways to deliver 

appropriate medical services, either directly or indirectly. Examples of those 

provisions include the excise tax on high-premium insurance plans; the creation 

of a new Medicare advisory board that might limit the growth rate of Medicare 

 Examining trends 

in hospital spending, she found that the substantial increase in demand for 

medical services generated by the introduction of Medicare in 1965 accelerated 

the dissemination of new medical procedures more broadly and could account for 

about half of the overall increase in hospital spending for the population as a 

whole that occurred in subsequent years. 

By that logic, the expansion of insurance coverage to millions of nonelderly 

people under this proposal could generate a larger increase in health care 

spending—and thereby health insurance premiums—than estimated here. 

However, several factors temper that conclusion. For one, the quantitative effect 

would presumably be smaller than that caused by Medicare because nonelderly 

people use less health care, on average, than elderly people. Moreover, Medicare 

initially paid hospitals on the basis of their incurred costs—an approach that gave 

hospitals little incentive to control those costs. The increase in hospital spending 

that resulted from Medicare’s creation could well have been smaller under a less 

generous payment system or in an era of more tightly managed care. In particular, 

roughly half of the increase in insurance coverage generated by this proposal 

would come from expanded enrollment in Medicaid, which pays relatively low 

rates to providers. Incentives for cost control would also be greater in the 

proposed exchanges, because exchange enrollees would have to pay the full 

additional cost of joining a more expensive insurance plan. Regardless, any 

effects of expanded insurance coverage on the dissemination of new medical 

procedures would unfold slowly and would have little effect on health care and 

health insurance premiums by 2016. 

32 See Amy Finkelstein, "The Aggregate Effects of Health Insurance: Evidence from the 

Introduction of Medicare," Quarterly Journal of Economics, vol. 122, no. 1 (February 2007), 

pp. 1–37. For additional discussion of this study, see Congressional Budget Office, Key Issues,

p. 111. 
spending; and certain changes in Medicare’s payment methods as well as new 

pilot and demonstration projects regarding other changes in payment methods 

(such as penalties for hospital readmissions that are deemed avoidable and 

incentives to coordinate patients’ care). The changes in Medicare’s payment 

methods could “spill over” to the private sector and decrease spending for health 

care relative to currently projected levels. However, the effects of those initiatives 

on Medicare’s spending are uncertain and would probably be small in 2016 

relative to the program’s total spending, so any spillover to private insurance at 

that point would probably be small as well. In addition, the excise tax on highpremium plans would apply to a small share of plans in 2016, so its effects on the 

cost and efficiency of health care would also probably be small at that point. 

All of those considerations serve to emphasize the considerable uncertainty that 

surrounds any estimate of the impact of any proposal that would make substantial 

changes in the health insurance or health care sectors, given the size and the 

complexity of those sectors. That uncertainty applies to the estimated effects of 

proposals on the federal budget and insurance coverage rates, as well as to their 

impact on premiums. 
TABLE 2. Analysis of Exchange Subsidies and Enrollee Payments in 2016 11/20/2009

Under the Patient Protection and Affordable Care Act

Estimate for "Reference Plan" in 2016 -- 2nd Lowest-Cost "Silver" Plan

Actuarial Value Average Premium Avg. Cost Sharing

Single Policy 70% $5,200 $1,900

Family Policy 70% $14,100 $5,000

Dollars

Percent of 

Income

100-150% /d 2.1% - 4.7% $ 14,700 $ 300 94% $ 1,100 $ 800 $ 1,100 7%

150-200% 4.7% - 6.5% $ 20,600 $ 1,200 77% $ 600 $ 1,300 $ 2,500 12%

200-250% 6.5% - 8.4% $ 26,500 $ 2,000 62% $ - $ 1,900 $ 3,900 15%

250-300% 8.4% - 10.2% $ 32,400 $ 3,000 42% $ - $ 1,900 $ 4,900 15%

300-350% 10.2% $ 38,300 $ 3,900 25% $ - $ 1,900 $ 5,800 15%

350-400% 10.2% $ 44,200 $ 4,500 13% $ - $ 1,900 $ 6,400 14%

400-450% n.a. $ 50,100 $ 5,200 0% $ - $ 1,900 $ 7,100 14%

Dollars

Percent of 

Income

100-150% /d 2.1% - 4.7% $ 30,000 $ 600 96% $ 3,300 $ 1,700 $ 2,300 8%

150-200% 4.7% - 6.5% $ 42,000 $ 2,400 83% $ 1,800 $ 3,200 $ 5,600 13%

200-250% 6.5% - 8.4% $ 54,000 $ 4,000 72% $ - $ 5,000 $ 9,000 17%

250-300% 8.4% - 10.2% $ 66,000 $ 6,100 57% $ - $ 5,000 $ 11,100 17%

300-350% 10.2% $ 78,000 $ 7,900 44% $ - $ 5,000 $ 12,900 17%

350-400% 10.2% $ 90,100 $ 9,200 35% $ - $ 5,000 $ 14,200 16%

400-450% n.a. $ 102,100 $ 14,100 0% $ - $ 5,000 $ 19,100 19%

Source: Congressional Budget Office and the Staff of the Joint Committee on Taxation.

Notes: All dollars figures have been rounded to the nearest $100; n.a. = not applicable; FPL = federal poverty level. 

b) In 2016, the FPL is projected to equal about $11,800 for a single person and about $24,000 for a family of four. 

c) Subsidies would be based on enrollees' household income, as defined in the bill. 

d) Under the bill, people with income below 133% of the FPL would generally be eligible for Medicaid and thus ineligible for exchange subsidies; 

the premium cap in 2014 for those with income below 133% of the FPL would be 2% of income. 

Single Person

Income 

Relative to 

the FPL

Premium Cap 

as a Share of 

Income /a

Middle of 

Income 

Range /b,c

Enrollee 

Premium for 

Low-Cost 

"Silver" Plan

Premium 

Subsidy 

(share of 

premium)

Average 

CostSharing 

Subsidy

Average 

Net Cost 

Sharing

Enrollee Premium + 

Avg. Cost Sharing

Family of Four

Income 

Relative to 

the FPL

Premium Cap 

as a Share of 

Income /a

Middle of 

Income 

Range /b,c

Enrollee 

Premium for 

Low-Cost 

"Silver" Plan

Premium 

Subsidy 

(share of 

premium)

Average 

CostSharing 

Subsidy

Average 

Net Cost 

Sharing

Enrollee Premium + 

Avg. Cost Sharing

a) In 2014, the income-based caps would range from about 4% at 133% of the FPL to 9.8% at 300% of the FPL, and that 9.8% cap would extend to 

400% of the FPL; in subsequent years, those caps would be indexed. 
 December 5, 2009

Estimated Average Premiums Under Current Law

Recently, the CBO and JCT staff released an analysis of average premiums for health insurance

under the Patient Protection and Affordable Care Act, as introduced; that analysis compared 

estimates of average premiums in 2016 under the proposal to those that would prevail under 

current law. Since then, CBO has received several requests for our estimates of average 

premiums in 2009. By market and type of coverage, those averages (and the corresponding 

averages for 2016 under current law) are as follows: 

Market Coverage 

Type

Average Premiums 

Under Current Law

2009 2016

NONGROUP (for 

individually purchased 

policies)

Single $3,800 $5,500

Family $9,000 $13,100

SMALL GROUP (for firms 

with 50 or fewer 

employees)

Single $5,400 $7,800

Family $13,300 $19,300

LARGE GROUP (for firms 

with more than 50 

employees)

Single $5,100 $7,400

Family $13,900 $20,300

The estimates for current premiums in the nongroup market are largely based on data from the 

Medical Expenditure Panel Survey. The estimates for current employment-based premiums are 

comparable to survey data on those premiums from the Kaiser Family Foundation. 
www.cbo.gov

CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director 

U.S. Congress 

Washington, DC 20515 

January 11, 2010 

Honorable Olympia Snowe 

United States Senate 

Washington, DC 20510 

Dear Senator: 

In late November, the Congressional Budget Office (CBO) and the staff of 

the Joint Committee on Taxation (JCT) released an analysis of average 

premiums for health insurance under the Patient Protection and Affordable 

Care Act (PPACA) as introduced.1

 That analysis compared the estimates of 

average premiums in 2016 under the proposal to those that would prevail 

under current law and distinguished the effects among the markets for 

individually purchased (nongroup) coverage, for small-group coverage, and 

for large-group coverage. 

This letter responds to your request for additional information about 

expected premiums under that proposal for policies that would meet the 

minimum requirements necessary to avoid paying a penalty for not having 

insurance. As a rule, individuals would be required to have a policy 

covering the “essential benefits” specified in the legislation and having an 

actuarial value of at least 60 percent in order to avoid such a penalty. (A 

plan’s actuarial value is the share of costs for covered services that it would 

pay, on average, with a broadly representative group of people enrolled.) 

That minimum level of coverage is designated as a “Bronze” plan. 

Several caveats apply to this analysis of Bronze premiums. First, it draws 

on the calculations of premiums that were done for the PPACA as 

originally introduced; as indicated in CBO’s cost estimate for the PPACA 

incorporating the manager’s amendment, the effects of the Senate-passed 

legislation on premiums are likely to be quite similar to those estimates but 

may not be identical.2

 Second, CBO has not analyzed premiums for Bronze 

 

1

 Congressional Budget Office, “An Analysis of Health Insurance Premiums Under the Patient 

Protection and Affordable Care Act,” attachment to a letter to the Honorable Evan Bayh 

(November 30, 2009). 

2

 Congressional Budget Office, cost estimate for the Patient Protection and Affordable Care Act, 

incorporating the manager's amendment (December 19, 2009). 
Honorable Olympia Snowe 

Page 2 

plans as closely as the overall average of premiums discussed in that earlier 

analysis—in part because, under the proposal, federal subsidies would be 

tied to the premiums of “Silver” plans (which would cover the same 

benefits but would have an actuarial value of 70 percent). In particular, the 

figures for Bronze premiums presented below reflect an assumption that the 

average age, family characteristics, and other factors associated with health 

care costs of enrollees in Bronze plans would be similar to those of 

enrollees in Silver plans (or that any impact on premiums of differences in 

those characteristics would be effectively offset by the risk-adjustment 

system and other such mechanisms that would be established under the 

proposal). Third, these figures do not reflect any subsidies provided by the 

government for the purchase of insurance (either currently or under the 

proposal). Finally, as in the previous analysis of premiums, the figures 

presented here represent national averages; premiums for specific 

individuals would differ on the basis of their age, average spending on 

health care in their area of the country, and the specific plan they chose. 

Overall, CBO estimates that premiums for Bronze plans purchased 

individually in 2016 would probably average between $4,500 and $5,000 

for single policies and between $12,000 and $12,500 for family policies. 

For comparison, the previous analysis of the PPACA as introduced found 

that average premiums among all types of plans in 2016 would be about 

$5,800 for single policies and about $15,200 for family policies. Average 

premiums for Bronze plans would be lower than average premiums for all 

plans because the actuarial value of Bronze plans would be 60 percent, 

compared with an estimated average actuarial value for all individually 

purchased plans of roughly 72 percent. That lower actuarial value would 

reduce premiums for Bronze plans directly, because the policy would pay 

for a smaller share of enrollees’ costs for covered services, and indirectly, 

because enrollees would use slightly fewer or less-expensive services when 

faced with the higher cost-sharing requirements included in Bronze plans. 

You also asked about the premiums that small employers would have to 

pay for the Bronze level of coverage. Under the legislation, small 

employers would be allowed to purchase coverage for their employees 

through the new insurance exchanges. More generally, the premiums that 

insurers charged to small employers for new policies, whether or not they 

were purchased through the exchanges, would be subject to the same rules 

on pricing that applied in the exchanges and would also be subject to risk 

adjustment (to offset the effects that having sicker-than-average or 

healthier-than-average enrollees would have on a plan’s premiums). Even 

so, the premiums for coverage purchased by a small employer would 

depend on the ages of the workers and dependents covered by the policy. If 

those employees had the same characteristics as the average individual 
Honorable Olympia Snowe 

Page 3 

purchaser of Bronze plans, then the premiums for the employer’s Bronze 

plan would be equivalent to the figures cited above. 

In general, however, small employers would provide plans with a greater 

amount of coverage than Bronze plans, as they do under current law. The 

average premiums in 2016 for plans provided by small employers cited in 

the recent analysis by CBO and JCT—about $7,800 for single policies and 

$19,200 for family policies—differ from the amounts cited above for 

individual Bronze policies primarily because the average actuarial value of 

coverage purchased by small employers would be substantially higher than 

the Bronze level (about 85 percent, CBO estimates, rather than 60 percent). 

The premiums for specific employers could deviate significantly from those 

averages for various reasons. 

I hope this information is helpful to you. If you have any further questions, 

please contact me or the CBO staff. The primary staff contact for this 

analysis is Philip Ellis. 

 Sincerely, 

 Douglas W. Elmendorf 

 Director 

cc: Honorable Harry Reid 

 Majority Leader 

 

Honorable Mitch McConnell 

 Republican Leader 

 
Analysis of Exchange Subsidies and Enrollee Payments in 2016 10/9/2009

Senate Finance Committee Chairman's Mark as Amended

Estimates for Second-Lowest-Cost "Silver" Plan

Actuarial Value Average Premium Avg. Cost Sharing

Single Policy 70% $5,000 $1,700

Family Policy 70% $14,700 $5,100

Dollars

Percent of 

Income

100-150% 2.1% - 4.8% 14,700$ $ 500 90% 1,200$ $ 500 1,000$ 7%

150-200% 4.8% - 7.5% 20,600$ $ 1,300 74% $ 700 1,000$ 2,300$ 11%

200-250% 7.5% - 10.1% 26,500$ $ 2,300 54% -$ 1,700$ 4,000$ 15%

250-300% 10.1% - 12.8% 32,400$ $ 3,700 26% -$ 1,700$ 5,400$ 17%

300-350% 12.8% 38,300$ $ 4,900 2% -$ 1,700$ 6,600$ 17%

350-400% 12.8% 44,200$ $ 5,000 0% -$ 1,700$ 6,700$ 15%

400-450% n.a. 50,100$ $ 5,000 0% -$ 1,700$ 6,700$ 13%

Dollars

Percent of 

Income

100-150% 2.1% - 4.8% 30,000$ $ 1,000 93% 3,600$ 1,500$ 2,500$ 8%

150-200% 4.8% - 7.5% 42,000$ $ 2,600 82% 1,900$ 3,200$ 5,800$ 14%

200-250% 7.5% - 10.1% 54,000$ $ 4,800 67% -$ 5,100$ 9,900$ 18%

250-300% 10.1% - 12.8% 66,000$ $ 7,600 48% -$ 5,100$ 12,700$ 19%

300-350% 12.8% 78,000$ $ 10,000 32% -$ 5,100$ 15,100$ 19%

350-400% 12.8% 90,100$ $ 11,500 22% -$ 5,100$ 16,600$ 18%

400-450% n.a. 102,100$ $ 14,700 0% -$ 5,100$ 19,800$ 19%

Source: Congressional Budget Office and the Staff of the Joint Committee on Taxation.

NOTES: All dollar figures have been rounded to the nearest $100; n.a. = not applicable; FPL = federal poverty level. 

a) In 2013, the income caps would range from 2% to 12%; in subsequent years those caps would be indexed. 

c) In 2016, the FPL is projected to equal about $11,800 for a single person and about $24,000 for a family of four. 

d) Under the proposal, subsidies would generally be based on income data from enrollees' tax returns. 

Premium Cap 

as a Share of 

Income / a,b

Middle of 

Income 

Range / c,d

Enrollee 

Premium for 

Low-Cost 

"Silver" Plan

b) In 2016, people would be exempt from the mandate penalty if they had to pay more than 8.5 percent of their income for insurance. 

Average 

CostSharing 

Subsidy

Average 

Net Cost 

Sharing

Single Person

Family of Four

Enrollee Premium + 

Avg. Cost Sharing

Premium 

Subsidy 

(share of 

premium)

Average 

CostSharing 

Subsidy

Enrollee Premium + 

Avg. Cost Sharing

Average 

Net Cost 

Sharing

Premium 

Subsidy 

(share of 

premium)

Income 

Relative to 

the FPL

Income 

Relative to 

the FPL

Premium Cap 

as a Share of 

Income / a,b

Middle of 

Income 

Range / c,d

Enrollee 

Premium for 

Low-Cost 

"Silver" Plan
CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director

U.S. Congress 

Washington, DC 20515 

November 2, 2009 

Honorable Charles B. Rangel 

Chairman 

Committee on Ways and Means 

U.S. House of Representatives 

Washington, DC 20515 

Dear Mr. Chairman: 

This letter responds to questions about the subsidies that enrollees would receive for premiums 

and cost sharing and the amounts that they would have to pay, on average, if they purchased a 

relatively low cost plan in the new insurance exchanges to be established under H.R. 3962, the 

Affordable Health Care for America Act, as introduced in the House of Representatives on 

October 29, 2009. The analysis reflects the preliminary analysis of that bill that the 

Congressional Budget Office (CBO), in conjunction with the staff of the Joint Committee on 

Taxation (JCT), released last week. 

Subsidies and Payments at Different Income Levels Under H.R. 3962 

The enclosed table focuses on enrollees who purchase a “reference” plan (the premiums for 

which equal the average of the three lowest-cost “basic” plans, as defined in the bill), because 

federal subsidies would be tied to that average. Such a plan would have an actuarial value of 

70 percent, which represents the average share of costs for covered benefits that would be paid 

by the plan. Although premiums under H.R. 3962 would vary by geographic area to reflect 

differences in average spending for health care and would also vary by age, the table shows the 

approximate national average for that lower-cost reference plan—about $5,300 for single 

policies and about $15,000 for family policies in 2016. Enrollees could purchase a more 

expensive plan or more extensive coverage for an additional, unsubsidized premium—and CBO 

anticipates that many enrollees would do that, so the average premiums actually paid in the 

exchanges would be higher (although average cost-sharing amounts could be lower than those 

shown in the table). The figures are presented for 2016 in order to illustrate the likely situation 

after the proposed changes in insurance markets were fully implemented. (A downside of that 

approach is that the figures are harder to compare with those observed in 2009.)

Under the House bill, the maximum share of income that enrollees would have to pay for the 

reference plan in 2013 would range from 1.5 percent for those with income less than or equal to 

133 percent of the federal poverty level (FPL) to 12 percent for those with income equal to 

400 percent of the FPL. (People with income below 150 percent of the FPL, however, would 

generally be eligible for Medicaid and thus ineligible for subsidies within the exchanges.) After 

2013, those income-based caps would all be indexed so that the share of the premiums that 

enrollees (in each income band) paid would be maintained over time. As a result, the incomebased caps would gradually become higher over time; for example, they are estimated to range 

from about 1.6 percent to about 12.8 percent in 2016. Enrollees with income below 350 percent 
Honorable Charles B. Rangel 

Page 2 

of the FPL would also be given cost-sharing subsidies to raise the actuarial value of their 

coverage to specified levels—ranging from 97 percent for those with income below 150 percent 

of the FPL to 72 percent for those with income between 300 percent and 350 percent of the FPL. 

To illustrate the effects of those features, the table shows the amounts of income that would 

correspond to the midpoint of each FPL band, the resulting premiums that single individuals and 

families of four would have to pay for a reference plan if their income equaled that midpoint, and 

the share of their income that would be represented by the sum of the enrollee premiums and the 

average cost-sharing amount at that midpoint. For instance, a single person with income of 

$26,500 in 2016 (225 percent of the FPL) would pay a premium of about $1,900 (after getting a 

premium subsidy of 64 percent) and could expect to pay another $900 in cost sharing (net of 

federal subsidies); thus, the average payment by such a person for the premium and cost sharing 

combined is projected to be $2,800, or about 11 percent of income. A family of four with income 

of about $54,000 (also 225 percent of the FPL in 2016) could expect to pay about the same share 

of its income for premiums and cost sharing. (Because use of health care in a given year varies 

widely, many people would pay less in cost sharing than the average, but some would pay 

more—subject to the limits on out-of-pocket costs that are specified in the bill.) 

Comparison with Premiums Under the Proposal Approved by the Senate Finance 

Committee 

The estimated average premiums and average cost-sharing amounts for the reference plan shown 

at the top of the table—before any subsidies are applied—are slightly higher than the premiums 

for the comparable plan shown in a similar table that CBO released on October 9 for the health 

care reform proposal introduced by the Chairman of the Senate Committee on Finance, as 

amended by the committee. (That table represented an update to a table enclosed in a letter to 

Chairman Baucus on September 22 that addressed the earlier Chairman’s mark.) In the proposal 

approved by the Finance Committee, the reference plan would be the second cheapest plan 

available in an area providing the “silver” level of benefits, which also would have a required 

actuarial value of 70 percent. Because the reference plans in both proposals would cover the 

same range of benefits and have the same extent of coverage (actuarial value), the difference in 

premiums cannot be attributed to a difference in coverage. Instead, the difference is the net result 

of a number of other provisions of each proposal and primarily reflects higher average health 

care costs projected for enrollees in the exchanges under the House bill than for enrollees in the 

exchanges under the Finance Committee’s proposal. 

Why would exchange enrollees under the House bill be slightly less healthy, on average, than 

exchange enrollees under the Finance Committee’s proposal? One reason is that the House bill 

offers greater subsidies for cost sharing, which would be more valuable to people with health 

problems and thus would tend to attract a less healthy mix of enrollees. The House bill also 

restricts more sharply the extent to which premiums can vary by age, which would make the 

exchanges less attractive to younger people (who tend to have lower health care costs) and more 

attractive to older people (who tend to have higher health care costs). Some other differences in 

the proposals also tend to generate a slightly less healthy pool of exchange enrollees under the 

House bill. 
Honorable Charles B. Rangel 

Page 3 

Yet, there are other factors working to counterbalance those effects and to limit the difference in 

exchange premiums between the two proposals. For example, the House bill would finance the 

operations of the insurance exchanges through mandatory appropriations rather than a surcharge 

on the plans offered in the exchanges; it would also include a public plan that CBO estimates 

would place some downward pressure on the premiums of private plans operating in the 

exchanges. In addition, under the Finance Committee’s proposal, less extensive premium 

subsidies and more extensive exemptions from the penalties for lacking insurance would weaken 

the incentives for healthier people to purchase insurance and thus would make for a less healthy 

pool of enrollees in that proposal, partly offsetting the factors noted above. On balance, however, 

CBO projects that the average premiums and cost-sharing payments for enrollees in the 

exchanges under the House bill would be slightly higher than those for enrollees in the 

exchanges under the Finance Committee’s proposal. 

I hope this analysis is helpful for your deliberations. If you have any questions, please contact me 

or CBO staff. The primary staff contact for this analysis is Philip Ellis. 

Sincerely, 

Douglas W. Elmendorf 

Director 

Enclosures 

cc: Honorable Dave Camp 

Ranking Member 

Identical letters sent to the Honorable George Miller, the Honorable Henry A. Waxman, the 

Honorable John D. Dingell, and the Honorable Max Baucus. 
Analysis of Exchange Subsidies and Enrollee Payments in 2016 11/2/2009

Under H.R. 3962, the Affordable Health Care for America Act

Estimate for "Reference Plan" in 2016 -- Average of 3 Lowest-Cost Basic Plans

Actuarial Value Average Premium Avg. Cost Sharing

Single Policy 70% $5,300 $2,000

Family Policy 70% $15,000 $5,500

Dollars

Percent of 

Income

100-150% /d 1.6% - 3.2% 14,700$ $ 200 96% 1,600$ $ 400 $ 600 4%

150-200% 3.2% - 5.9% 20,600$ $ 900 83% 1,400$ $ 600 1,500$ 7%

200-250% 5.9% - 8.5% 26,500$ $ 1,900 64% 1,100$ $ 900 2,800$ 11%

250-300% 8.5% - 10.7% 32,400$ $ 3,100 42% $ 700 1,300$ 4,400$ 14%

300-350% 10.7% - 11.7% 38,300$ $ 4,300 19% $ 200 1,800$ 6,100$ 16%

350-400% 11.7% - 12.8% 44,200$ $ 5,300 0% -$ 2,000$ 7,300$ 17%

400+% n.a. 50,100$ $ 5,300 0% -$ 2,000$ 7,300$ 15%

Dollars

Percent of 

Income

100-150% /d 1.6% - 3.2% 30,000$ $ 500 97% 4,900$ $ 600 1,100$ 4%

150-200% 3.2% - 5.9% 42,000$ $ 1,900 87% 4,300$ 1,200$ 3,100$ 7%

200-250% 5.9% - 8.5% 54,000$ $ 3,900 74% 3,200$ 2,300$ 6,200$ 11%

250-300% 8.5% - 10.7% 66,000$ $ 6,300 58% 1,800$ 3,700$ 10,000$ 15%

300-350% 10.7% - 11.7% 78,000$ $ 8,800 41% $ 500 5,000$ 13,800$ 18%

350-400% 11.7% - 12.8% 90,100$ $ 11,100 26% -$ 5,500$ 16,600$ 18%

400-450% n.a. 102,100$ $ 15,000 0% -$ 5,500$ 20,500$ 20%

Source: Congressional Budget Office and the staff of the Joint Committee on Taxation.

Notes: All dollars figures have been rounded to the nearest $100; n.a. = not applicable; FPL = federal poverty level. 

a) In 2013, the income-based caps would range from 1.5% to 12% according to a specified schedule; in subsequent years they would be indexed. 

b) In 2016, the FPL is projected to equal about $11,800 for a single person and about $24,000 for a family of four. 

c) Under the bill, subsidies would be based on enrollees' adjusted gross income. 

Single Person

Family of Four

Enrollee Premium + 

Avg. Cost Sharing

Premium 

Subsidy 

(share of 

premium)

Average 

CostSharing 

Subsidy

Average 

Net Cost 

Sharing

d) Under the bill, people with income below 150% of the FPL would generally be eligible for Medicaid and thus ineligible for exchange subsidies. 

Income 

Relative to 

the FPL

Income 

Relative to 

the FPL

Premium Cap 

as a Share of 

Income /a

Middle of 

Income 

Range /b,c

Enrollee 

Premium in 

Reference 

Plan

Premium Cap 

as a Share of 

Income /a

Middle of 

Income 

Range /b,c

Enrollee 

Premium in 

Reference 

Plan

Average 

CostSharing 

Subsidy

Average 

Net Cost 

Sharing

Enrollee Premium + 

Avg. Cost Sharing

Premium 

Subsidy 

(share of 

premium)
CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director

U.S. Congress

Washington, DC 20515

November 20, 2009 

Honorable Harry Reid 

Majority Leader 

United States Senate 

Washington, DC 20510

Dear Mr. Leader: 

This letter responds to questions about the subsidies that enrollees would receive for premiums 

and cost sharing and the amounts that they would have to pay, on average, if they purchased a 

relatively low cost plan in the new insurance exchanges to be established under the Patient 

Protection and Affordable Care Act, as proposed on November 18, 2009. The analysis reflects 

the estimate of that bill that the Congressional Budget Office (CBO), in conjunction with the 

staff of the Joint Committee on Taxation (JCT), released on that date. 

Subsidies and Payments at Different Income Levels Under the Patient Protection and 

Affordable Care Act

The enclosed table focuses on enrollees who purchase a “reference” plan—the second lowest

cost “silver” plan, as defined in the bill—because federal subsidies would be tied to the premium 

for it. Such a plan would have an actuarial value of 70 percent, which represents the average 

share of costs for covered benefits that would be paid by the plan. Although premiums under the 

bill would vary by geographic area to reflect differences in average spending for health care and 

would also vary by age, the table shows the approximate national average for that lower-cost 

reference plan: about $5,200 for single policies and about $14,100 for family policies in 2016. 

Enrollees could purchase a more expensive plan or more extensive coverage for an additional, 

unsubsidized premium—and CBO anticipates that many enrollees would do that, so the average 

premiums actually paid in the exchanges would be higher (although average cost-sharing 

amounts could be lower than those shown in the table). The figures are presented for 2016 in 

order to illustrate the likely situation after the proposed changes in insurance markets were fully 

implemented.

1

 A downside of that approach is that the figures are harder to compare with those 

observed in 2009. 

Under the bill, the maximum share of income that enrollees would have to pay for the reference 

plan would vary depending on their income relative to the federal poverty level (FPL). For 

enrollees with income below 133 percent of the FPL, the maximum share of income paid for that 

1 The bill includes a reinsurance program that would operate from 2014 through 2016, financed by a fee on insurers. 

Because that program is temporary, its effects on premiums in 2016 have not been reflected in the attached table in 

order to provide a more accurate assessment of the bill’s impact once it is fully implemented. 
plan would be 2 percent in 2014.2

 For enrollees with income between 133 percent and 300 

percent of the FPL, that maximum share of income would vary linearly from about 4 percent of 

income to 9.8 percent of income in 2014. For enrollees with income between 300 percent and 

400 percent of the FPL, that maximum share of income would equal 9.8 percent. After 2014, 

those income-based caps would all be indexed so that the share of the premiums that enrollees 

(in each income band) paid would be maintained over time. As a result, the income-based caps 

would gradually become higher over time; for example, they are estimated to range from about 

2.1 percent to about 10.2 percent in 2016. Enrollees with income below 200 percent of the FPL 

would also be given cost-sharing subsidies to raise the actuarial value of their coverage to 

specified levels: 90 percent for those with income below 150 percent of the FPL and 80 percent 

for those with income between 150 percent and 200 percent of the FPL. 

To illustrate the effects of those features, the table shows the amounts of income that would 

correspond to the midpoint of each FPL band, the resulting premiums that single individuals and 

families of four would have to pay for a reference plan if their income equaled that midpoint, and 

the share of their income that would be represented by the sum of the enrollee premiums and the 

average cost-sharing amount at that midpoint. For instance, a single person with income of 

$26,500 in 2016 (225 percent of the FPL) would pay a premium of about $2,000 for the 

reference plan (after getting a premium subsidy of 62 percent) and could expect to pay another 

$1,900 in cost sharing; thus, the average payment by such a person for the premium and cost 

sharing combined is projected to be $3,900, or about 15 percent of their income. A family of four 

with income of about $54,000 (also 225 percent of the FPL in 2016) could expect to pay about 

17 percent of its income for premiums and cost sharing for the reference plan. (Because use of 

health care in a given year varies widely, many people would pay less in cost sharing than the 

average, but some would pay more—subject to the limits on out-of-pocket costs that are 

specified in the bill.) 

Comparison with Premiums Under the Proposal Approved by the Senate Finance 

Committee

The estimated average premiums and average cost-sharing amounts for the reference plan shown 

at the top of the table—before any subsidies are applied—differ somewhat from those shown in a 

similar table that CBO released on October 9 for the health care reform proposal that was 

ultimately approved by the Senate Finance Committee. Those differences primarily reflect 

differences between the proposals, including differences in the types of people who would enroll 

in single and family plans as a result of their disparate provisions. Key differences that affect 

premiums include the following: 

• Under the proposal approved by the Senate Finance Committee, premiums for exchange 

plans would include the costs of covering all state-mandated benefits. Under the proposal 

now being considered by the Senate, however, states would have to pay those costs for 

any benefits that are not included in the list of “essential health benefits” specified in the 

bill (which would be further delineated by the Secretary of Health and Human Services). 

2

 People with income below 133 percent of the FPL would generally be eligible for Medicaid and thus ineligible for 

subsidies within the exchanges. 
Consequently, CBO has excluded from its calculation of premiums the estimated costs 

that states would have to pay. 

• CBO estimates that the availability of a “public plan” in some states under the current 

proposal would put some downward pressure on the premiums of private plans offered in 

the exchanges in those states, and thus would affect the premium for the reference plan.3 

• The proposals also differ in the extent to which they would allow premiums in the 

exchanges to vary by age. CBO estimates that the tighter age bands in the current 

proposal would make older people more likely to seek coverage through the exchanges 

but would discourage some younger people from enrolling in that coverage—which 

would raise the average premium in the exchanges, particularly for single coverage. 

More generally, the factors that affect insurance premiums are complex, and the resulting 

amounts reflect an interaction of many forces—so caution should be exercised when interpreting 

differences in those premiums. CBO expects to provide a broader analysis of premiums under 

the Patient Protection and Affordable Care Act in the near future. 

I hope this analysis is helpful for your deliberations. If you have any questions, please contact me 

or CBO staff. The primary staff contact for this analysis is Philip Ellis. 

Sincerely,

Douglas W. Elmendorf 

Director

Enclosure 

cc: Honorable Mitch McConnell 

Republican Leader

3 For additional discussion of this effect, see Congressional Budget Office, letter to the Honorable Michael B. Enzi 

providing supplemental information on potential effects of the Affordable Health Choices Act (September 10, 

2009). 
Analysis of Exchange Subsidies and Enrollee Payments in 2016 11/20/2009

Under the Patient Protection and Affordable Care Act

Estimate for "Reference Plan" in 2016 -- 2nd Lowest-Cost "Silver" Plan

Actuarial Value Average Premium Avg. Cost Sharing

Single Policy 70% $5,200 $1,900

Family Policy 70% $14,100 $5,000

Dollars

Percent of 

Income

100-150% /d 2.1% - 4.7% 14,700$ $ 300 94% 1,100$ $ 800 1,100$ 7%

150-200% 4.7% - 6.5% 20,600$ $ 1,200 77% $ 600 1,300$ 2,500$ 12%

200-250% 6.5% - 8.4% 26,500$ $ 2,000 62% -$ 1,900$ 3,900$ 15%

250-300% 8.4% - 10.2% 32,400$ $ 3,000 42% -$ 1,900$ 4,900$ 15%

300-350% 10.2% 38,300$ $ 3,900 25% -$ 1,900$ 5,800$ 15%

350-400% 10.2% 44,200$ $ 4,500 13% -$ 1,900$ 6,400$ 14%

400-450% n.a. 50,100$ $ 5,200 0% -$ 1,900$ 7,100$ 14%

Dollars

Percent of 

Income

100-150% /d 2.1% - 4.7% 30,000$ $ 600 96% 3,300$ 1,700$ 2,300$ 8%

150-200% 4.7% - 6.5% 42,000$ $ 2,400 83% 1,800$ 3,200$ 5,600$ 13%

200-250% 6.5% - 8.4% 54,000$ $ 4,000 72% -$ 5,000$ 9,000$ 17%

250-300% 8.4% - 10.2% 66,000$ $ 6,100 57% -$ 5,000$ 11,100$ 17%

300-350% 10.2% 78,000$ $ 7,900 44% -$ 5,000$ 12,900$ 17%

350-400% 10.2% 90,100$ $ 9,200 35% -$ 5,000$ 14,200$ 16%

400-450% n.a. 102,100$ $ 14,100 0% -$ 5,000$ 19,100$ 19%

Source: Congressional Budget Office and the Staff of the Joint Committee on Taxation.

Notes: All dollars figures have been rounded to the nearest $100; n.a. = not applicable; FPL = federal poverty level. 

b) In 2016, the FPL is projected to equal about $11,800 for a single person and about $24,000 for a family of four. 

c) Subsidies would be based on enrollees' household income, as defined in the bill. 

a) In 2014, the income-based caps would range from about 4% at 133% of the FPL to 9.8% at 300% of the FPL, and that 9.8% cap would extend to 

400% of the FPL; in subsequent years, those caps would be indexed. 

d) Under the bill, people with income below 133% of the FPL would generally be eligible for Medicaid and thus ineligible for exchange subsidies; 

the premium cap in 2014 for those with income below 133% of the FPL would be 2% of income. 

Single Person

Income 

Relative to 

the FPL

Premium Cap 

as a Share of 

Income /a

Middle of 

Income 

Range /b,c

Enrollee 

Premium for 

Low-Cost 

"Silver" Plan

Premium 

Subsidy 

(share of 

premium)

Average 

CostSharing 

Subsidy

Average 

Net Cost 

Sharing

Enrollee Premium + 

Avg. Cost Sharing

Family of Four

Income 

Relative to 

the FPL

Premium Cap 

as a Share of 

Income /a

Middle of 

Income 

Range /b,c

Enrollee 

Premium for 

Low-Cost 

"Silver" Plan

Premium 

Subsidy 

(share of 

premium)

Average 

CostSharing 

Subsidy

Average 

Net Cost 

Sharing

Enrollee Premium + 

Avg. Cost Sharing
Federal Budgetary Issues

During the debate over health care legislation, a number of questions arose concerning how to 

account for and reflect the impact of proposals on the federal budget. CBO produced several 

analyses examining those issues, including these: 

1. An issue brief regarding the budgetary treatment of proposals to change the health insurance system, which was released on May 27, 2009. That brief addressed the issue of what 

payments for health insurance should be reflected in the federal budget—and, in particular, what sorts of federal regulations would, in combination with a mandate to purchase 

coverage, mean that premiums paid by enrollees to private insurers should be treated as 

part of the federal budget because they had been made essentially governmental activities. 

2. A letter to Senate Finance Committee Chairman Max Baucus, dated October 30, 2009, 

primarily assessing the impact of proposals on the “federal budgetary commitment to 

health care”—that is, their effects both on federal spending for health care and on the 

reductions in revenues that stem from preferential treatment in the tax code for health 

insurance. 

3. A two-page analysis, dated December 13, 2009, of the budgetary treatment of proposals 

to regulate health insurers’ medical loss ratios—that is, the share of premium dollars that 

are spent for health care services (as opposed to administrative costs or profits). In particular, the analysis considered the circumstances under which such regulations, when combined with an individual mandate to purchase insurance, would so limit the flexibility of 

insurers as to warrant including premium payments in the federal budget. 

4. A letter to Senator Jeff Sessions, dated January 22, 2010, addressing the effects of 

reductions in spending on Medicare on both the federal budget deficit and the status of 

Medicare’s trust funds. 

ECONOMIC AND BUDGET ISSUE BRIEF

The Budgetary Treatment of Proposals to Change the 

Nation’s Health Insurance System

The Congress is currently considering various approaches 

for instituting major changes in the nation’s system of 

health insurance. Some of those proposals would significantly expand the federal government’s role in that system, thus raising the question of how such changes might 

be reflected in the federal budget. This brief describes 

the approach that the Congressional Budget Office 

(CBO) will take in judging the appropriate budgetary 

treatment.1

In determining the budgetary treatment of a new program, CBO considers how similar existing programs 

appear in the budget and how the basic principles that 

underlie federal budgeting may apply. The most straightforward situation is one in which money flows through a 

federal agency or some entity acting on behalf of a federal 

agency. In those cases, the cash flows generally appear in 

the federal budget. But the major changes being contemplated for the nation’s health insurance market are quite 

different from existing federal programs. Many of those 

changes would involve a mix of governmental activities 

and private transactions that have some similarities to 

other programs but are also different in significant ways. 

In addition, the scope of the changes and the amounts of 

money involved are substantial; even if there was a clear 

parallel in an existing but much smaller program, the 

budgetary treatment of health care legislation would 

nevertheless merit careful consideration. 

In making decisions about budgetary accounting, experts 

often refer to the 1967 Report of the President’s Commission on Budget Concepts. That report stated, “To work 

well, the governmental budget process should encompass 

the full scope of the programs and transactions that are 

within the Federal sector and not subject to the economic 

disciplines of the marketplace.” The commission recommended that “the budget should, as a general rule, be 

comprehensive of the full range of Federal activities.” As 

the commission noted, however, “the boundaries of the 

federal establishment are sometimes difficult to draw.”

Common Features of Emerging 

Proposals

Many of the proposals under consideration share some or 

all of the following features: 

B A mandate on all (or most) individuals to have health 

insurance coverage providing some specified minimum level of benefits. 

B A “play-or-pay” requirement, whereby some or all 

firms would have to either offer health insurance to 

their employees or make a payment to the federal government.

B New subsidies and expanded eligibility for the existing 

Medicaid program to make coverage more affordable 

for some individuals and families.

B New “exchanges” through which individuals and, in 

some cases, small employers could purchase health 

insurance. In some proposals, exchanges are envisioned as private online clearinghouses similar to 

Orbitz or e-health (perhaps authorized or regulated by 

a federal agency). Under others, they would be much 

more like governmental entities in that they would be 

responsible for administering subsidies; for collecting 

payments for premiums and conveying those funds to 

insurers; for negotiating with insurers over the benefits 

offered and the prices charged; and for performing 

other oversight responsibilities. 

CBO A series of issue summaries from

the Congressional Budget Office

MAY 27, 2009

1. The Congressional Budget Office will estimate the budgetary 

impact of legislation as it is being considered by the Congress. If 

legislation is enacted into law, the Administration’s Office of 

Management and Budget will ultimately determine how its effects 

will be reflected in the federal budget.
2 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

B The establishment of a “public plan” (defined in various ways) to be offered through the exchanges alongside private plans.

B A federal health board with some responsibility for the 

oversight of—or decisionmaking about—the required 

level of benefits or coverage or the operations of the 

exchanges. At this time, the extent of responsibility 

that such a board might have for the health insurance 

market is unclear.

The Budgetary Treatment of 

Various Types of Proposed Cash 

Transactions of the Government

Some of the budgetary judgments related to current 

proposals appear to be relatively straightforward in that 

they clearly involve cash transactions of the federal 

government or of other entities acting on behalf of the 

government. Such transactions include the provision of 

subsidies for some people and businesses; the income and 

expenditures of a public health insurance plan; the government’s receipts from “play-or-pay” requirements and 

from penalties imposed on individuals who fail to comply 

with a health insurance mandate; and “risk adjustment” 

transactions of the government that shift funds from 

insurers with lower-risk enrollees to those with higherrisk enrollees. 

Subsidies for Some People and Small Firms

Subsidies for the purchase of health insurance would, 

under some proposals, be delivered to some people and 

small firms as tax credits; under others, they would be 

payments made through insurance exchanges or other 

agencies to insurance carriers. Either way, such subsidies 

would be direct costs to the federal government and 

should be reflected in the federal budget—like, for 

example, outlays for Medicaid and the effects on revenues 

and outlays from the earned income tax credit. 

Expenditures and Income of a Public Plan 

Some proposals would require the federal government––

or in some cases, the insurance exchanges––to establish a 

new “public” insurance product to be offered through the 

exchanges. In many cases, a public plan would compete 

directly with private plans sold through the exchanges 

and could be held to similar rules prescribing covered 

benefits and pricing of those plans. Unlike privately 

offered plans, however, the public plan’s initial start-up 

costs might be covered by the federal government, and in 

some cases, the rates that it paid providers would be 

linked to the payment rates of existing public programs. 

Under some proposals, the public plan would be directly 

administered by the agency overseeing its establishment, 

and under others, the overseeing agency would be authorized to use a third-party administrator.

In CBO’s view, the budgetary treatment of a public plan 

would depend critically on who bore the financial risk. If 

the federal government stood behind the plan financially, 

then its expenditures should be considered federal outlays 

and the payments collected for premiums should be considered as either federal revenues or as offsets to outlays 

(see the discussion below regarding how that choice 

would be made). That approach would be consistent with 

the treatment of expenditures for Medicare, which is one 

potential model for a public plan. Even if such a plan was 

administered by a third party, the budgetary treatment of 

the public plan would be the same as long as the government was backing it financially—because the third party 

would be acting as an agent of the federal government. 

Payments to the Government Under “Play-or-Pay” 

Requirements or for Noncompliance with the 

Mandate

Under some proposals, firms would be required to make 

payments to the federal government if they chose not to 

offer health insurance to their employees, and individuals 

who did not comply with the requirement to obtain 

insurance would have to pay a penalty. Such payments 

would be equivalent to a tax or a fine, and the government’s receipts should be recorded in the budget as federal revenues.

Risk Adjustment Transactions of the Government

Under some proposals, the government would make 

additional payments to plans that attracted relatively 

unhealthy people, drawing those funds from plans with 

relatively healthy enrollees. Those “risk adjustment” 

transactions, aimed at improving the functioning of the 

insurance market and enhancing the availability of private insurance for high-risk individuals, would redistribute funds to the former plans financed by what would 

essentially be a tax on the latter. Those cash flows should 

appear in the federal budget. 
ECONOMIC AND BUDGET ISSUE BRIEF

THE BUDGETARY TREATMENT OF PROPOSALS TO CHANGE THE NATION’S HEALTH INSURANCE SYSTEM 3

The Budgetary Treatment of a 

Federal Mandate

The imposition of a federal mandate requiring individuals to have a certain minimum amount of health insurance coverage raises more complex issues of budgetary 

treatment. In considering those issues, CBO first 

addressed two basic questions: 

B Can cash transactions between private entities—in 

which the funds do not pass through the U.S. Treasury—be reflected in the federal budget? 

B Does the existence of a federal mandate, by itself, 

justify inclusion in the budget of the private-sector 

costs of the mandated activity?

Can Cash Transactions Between Private Entities Be 

Reflected in the Federal Budget? 

The answer is clearly “yes” when a private entity is acting 

as an agent of the federal government in carrying out a 

federal program under the government’s direction. For 

example, the Coal Industry Retiree Health Benefits Program is included in the federal budget, even though its 

funds do not pass through the Treasury. That program 

guarantees lifetime health benefits for certain miners and 

their dependents, and coal companies are required by law 

to pay health insurance premiums to two privately 

managed trust funds on behalf of those miners. Even 

though the benefit plans are nominally private and the 

federal government plays no role in selecting their trustees, the receipts and spending appear in the federal budget because federal law requires the payment of premiums 

and determines the use of the money.

Another example is the Universal Service Fund. Federal 

law requires providers of telecommunications services to 

make payments to that fund, which is administered by 

the Universal Service Administrative Company (USAC), 

a not-for-profit corporation whose board members are 

nominated by various affected parties and approved by 

the Chairman of the Federal Communications Commission. Those funds are used to subsidize telecommunications services for high-cost areas, low-income consumers, 

rural health care providers, schools, and libraries. The 

payments to the USAC and its disbursements are 

included in the federal budget because those payments 

are essentially federal taxes and its disbursements are 

federal subsidies.

In both cases, a nominally private entity is acting as an 

agent of the government in carrying out a federal program, and the budget shows the income and expenditures 

associated with that program.

Does the Existence of a Federal Mandate, by Itself, 

Justify Inclusion in the Budget of the Private-Sector 

Costs of the Mandated Activity?

CBO concludes that the answer to that question is “no.” 

The federal government imposes a variety of mandates on 

private entities. For example, there are federal requirements regarding minimum wages, occupational safety 

and health, the treatment of persons with disabilities, 

food and drug safety, the fuel efficiency of automobiles, 

and environmental impacts. Many of those laws impose 

substantial costs on businesses, and some directly affect 

employees’ compensation, but the budget includes none 

of their costs. State and local governments impose mandates on businesses and on individuals as well, including 

requirements related to automobile insurance and auto 

safety inspections, the installation of smoke detectors, 

and the use of child car seats and bicycle helmets. The 

associated costs are not included in government budgets. 

Some proposals under consideration would require all 

U.S. citizens or legal residents to have a certain minimum 

amount of health insurance. Existing mandates, like 

those cited above, are not so broad and do not affect as 

many people as would a mandate to buy health insurance, which might be legally avoided only by leaving the 

country. But the fact that one can avoid a mandate 

imposed on businesses by closing down a business, or a 

mandate to buy auto insurance by not owning a car, does 

not distinguish those mandates––as a matter of budgetary 

principle––from a broader mandate imposed on all citizens. CBO therefore concludes that a national requirement for individuals to buy health insurance would not, 

by itself, justify including the costs of that insurance in 

the federal budget and that other factors, in addition to 

the existence of a mandate, should be considered in making that determination.2

What are those factors? To the extent that firms or individuals would be purchasing insurance from the govern2. Regardless of whether CBO concluded that the private costs of 

purchasing insurance should be included in the federal budget, 

CBO’s cost estimates for legislation would include an analysis of 

the costs of carrying out a mandate, as required under the 

Unfunded Mandates Reform Act.
4 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

ment or via some entities acting on behalf of the government, the cash flows to and from the government (or 

such entities) should appear in the budget. But the budgetary treatment of purchases of insurance from private 

companies is more complicated. At its root, the key consideration is whether the proposal would be making 

health insurance an essentially governmental program, 

tightly controlled by the federal government with little 

choice available to those who offer and buy health insurance—or whether the system would provide significant 

flexibility in terms of the types, prices, and number of 

private-sector sellers of insurance available to people. 

In CBO’s view, the former—a governmental program—

belongs in the federal budget (including all premiums 

paid by individuals and firms to private insurers), but the 

latter—a largely private-sector system—does not. An 

example of the latter is the automobile insurance market. 

There is an active private market for automobile insurance; even though states require the purchase of specified 

minimum amounts of some types of coverage, automobile owners generally have many choices of how much 

coverage to acquire, which insurer to use, and what price 

to pay.

Although the appropriate budgetary treatment for the 

two approaches differs starkly, there is no well-defined 

dividing line between the two concepts. Rather, proposals 

may fall at various points along the broad spectrum 

between the two extremes, and characterizing a proposal 

as being in one category or the other can be challenging. 

In assessing where, along the spectrum, a particular proposal falls, CBO will consider a number of criteria, 

including these:

B Is the consumer likely to be able to choose among 

a number of insurance plans with differing degrees of 

comprehensiveness? 

B If there are plans with different levels of coverage, will 

they cover a broad enough range to offer consumers a 

meaningful choice? 

B Is the consumer likely to be able to choose among 

several different insurance companies competing on 

price? (The particular role of a public plan in that 

determination is discussed below.) 

The extent to which a proposal would constrain individuals’ choices regarding coverage levels can itself be difficult 

to measure, but the actuarial values from which individuals would be allowed to select provide a useful metric. (An 

insurance policy’s actuarial value is the percentage of 

expected health claims for covered services that an insurance plan will pay.)3 Estimates of the actuarial value of 

employment-based health plans vary, but typical plans 

appear to have an actuarial value that is between 80 percent and 95 percent, reflecting in part the favorable tax 

treatment afforded to such plans. Policies purchased in 

the individual insurance market generally have a lower 

actuarial value. The actuarial value of Medicare’s benefits, 

if offered to a nonelderly population, has been estimated 

at roughly 75 percent.4

CBO will assess whether a proposal would tightly control 

the private insurance market by examining, among other 

characteristics, the number and range of allowed benefit 

levels in terms of their actuarial values. A proposal that 

would limit insurance plans to one or two specific levels 

of benefits, for example, would be offering consumers 

little choice. Setting a very high minimum actuarial value 

(termed the “minimum creditable coverage”) would limit 

the range of consumers’ choices, as would setting a narrow range for actuarial values––if, for example, plans had 

to have an actuarial value of at least 85 percent but not 

more than 90 percent. CBO will deem proposals that set 

minimum creditable coverage at more than 80 percent to 

be too constraining to offer consumers substantial choice. 

In sum, the existence of a mandate, by itself, is not sufficient cause to bring transactions between private-sector 

entities into the federal budget. Similarly, the existence of 

a tightly regulated but still voluntary activity is also insufficient to bring such transactions into the budget. (Medigap policies, which are supplemental private health insurance policies to fill the gaps in Medicare coverage, are an 

example of the latter.) In CBO’s view, a combination of 

the two—a mandate and tight federal control over how 

that mandate can be met—is necessary and sufficient to 

3. For a more detailed explanation of actuarial values and how they 

are calculated, see Congressional Budget Office, Key Issues In 

Analyzing Major Health Insurance Proposals (December 2008), 

pp. 64–65. 

4. Chris L. Peterson, Setting and Valuing Health Insurance Benefits,

R40491 (Congressional Research Service, April 6, 2009). For 

additional discussion of the actuarial value of Medicare’s benefits, 

see Congressional Budget Office, Key Issues In Analyzing Major 

Health Insurance Proposals (December 2008), p. 92. 
ECONOMIC AND BUDGET ISSUE BRIEF

THE BUDGETARY TREATMENT OF PROPOSALS TO CHANGE THE NATION’S HEALTH INSURANCE SYSTEM 5

justify recording the affected private-sector transactions 

in the federal budget.

Under that criterion, different segments of the health 

insurance market could be treated differently in the budget if they were regulated differently. For example, in conjunction with a mandate to purchase insurance, a tightly 

regulated market for individual or small-group coverage 

could be accompanied by a much less constrained market 

for other forms of employer-sponsored insurance; if so, 

purchases of individual or small-group policies might be 

included in the budget, whereas other employers’ purchases of insurance might not be. 

The Budgetary Treatment of Insurance 

Exchanges

Many of the proposals under consideration would establish some sort of insurance “exchanges.” Under some 

proposals, those exchanges would essentially be private 

clearinghouses. Under others, exchanges would collect 

payments from individuals and perhaps from employers, 

and would then pay premiums to participating plans. 

Exchanges might be operated by or under the aegis of the 

federal government, or they might be operated by states 

or groups of states.

The question arises as to whether payments by individuals and employers that pass through exchanges should be 

considered receipts of the federal government and premiums paid through exchanges to insurance companies as 

outlays of the government. (Alternatively, those transactions could be considered private transactions that should 

not be reflected in the federal budget.) In CBO’s view, the 

answer partly depends on whether individuals and firms 

would direct their payments to exchanges that in turn 

would pay insurers, or whether individuals and firms 

would make their payments via the exchanges to the 

insurers themselves. In the former case, the answer would 

also depend on whether the exchanges were considered to 

be federal entities (either federal agencies or nonfederal 

parties acting as agents of the federal government) or not.

If payments were made to and by exchanges, and if the 

exchanges were effectively federal entities, then the payments should be included in the federal budget. However, if the payments were made directly from individuals 

and firms to insurance companies via exchanges, or if the 

payments were made to and by the exchanges but the 

exchanges were not federal entities, then the payments 

should not be included in the budget (unless other criteria would justify their inclusion in the budget).

Exchanges that would be federally operated or administered by third parties acting as agents of the federal 

government would be deemed federal. For example, if 

proposals specified in detail the duties of exchanges, the 

kinds of products that could be offered through them, 

and their oversight responsibilities, then CBO would 

conclude that the exchanges should be treated as federal 

even when operated by other parties. If, instead, proposals delegated the determination of such specifications to a 

federally established board, the exchanges would still be 

operating as arms of the federal government. Although 

state agencies cannot be required to serve as agents of the 

federal government, under some plans states could choose 

to assume those responsibilities, and CBO would treat 

them according to these same criteria.

In contrast, if proposals call for exchanges that would 

simply be clearinghouses to facilitate the purchase of 

insurance from a variety of private insurers—serving as a 

marketplace for health insurance plans but not regulating 

that market themselves—then CBO would not view the 

exchanges as federal agencies. In such cases, the treatment 

of the cash flows would depend on whether that portion 

of the system was inherently governmental—that is, 

whether there was a mandate on individuals to purchase 

insurance and how tightly constraining that mandate 

was, as discussed earlier.5

The availability of a public plan through an exchange 

raises an additional set of issues about whether consumers 

who purchase coverage through that mechanism would 

have a meaningful set of choices available to them. Specifically, if a public plan dominated an exchange-based market, then that component of the health insurance system 

would, in practice, be largely governmental. In that case, 

all of the transactions of the exchange should properly be 

considered part of the budget—and premium collections 

should be recorded as revenues, for reasons discussed 

below—even if the number and range of benefit levels 

available through the exchange remained broad. The 

nature of the competition between a public plan and 

5. In general, if exchanges are deemed to be federal, their operating 

costs should be included in the federal budget.
6 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

Table 1.

The Budgetary Treatment of Various Aspects of Health Insurance Proposals

Source: Congressional Budget Office.

Note: Different segments of the health insurance market could be treated differently in the budget if they are regulated differently.

private plans would probably vary geographically, but if 

the share of individuals purchasing coverage through 

exchanges who were projected to enroll in a public plan 

approached or exceeded two-thirds nationwide, CBO 

would consider the exchange system to be essentially 

governmental.

Should Income from Premiums Be 

Considered Federal Revenues or 

Offsets to Federal Spending?

If payments of health insurance premiums should be 

recorded in the federal budget, then another question 

arises: How should such collections be classified in the 

budget? Money collected by the federal government and 

recorded in the budget can be classified as either governmental receipts (typically called revenues or receipts) or as 

offsets to spending (that is, amounts deducted from outlays to yield net outlays). For the most part, revenues are 

collections from the public that result from the exercise of 

the government’s sovereign power to tax or otherwise 

compel payment. Offsets to outlays, by contrast, are typically businesslike transactions with the public (that is, 

payments from the public in exchange for goods or services); depending on whether the collections are credited 

to specific spending accounts, they may be labeled either 

“offsetting receipts” or “offsetting collections.” For example, premiums for Parts B and D of Medicare that are 

paid through withholding from Social Security benefits; 

income from the sale of timber, minerals, power, and 

postage stamps; and customs and passport fees are all 

currently classified as offsetting receipts or collections. 

If income from premiums was counted as federal revenues and an equal amount of expenditures was counted 

as outlays, there would be no effect on the federal deficit—but the total size of the budget would be greater, 

indicating a greater scope of sovereign governmental 

activity. In contrast, if income from premiums was 

counted as an offset to outlays and was matched by an 

equal amount of outlays, federal revenues would not 

be affected and net outlays would not change, indicating 

that the new activity was primarily businesslike or 

market-oriented.

In CBO’s view, a requirement that individuals purchase 

health insurance combined with tight federal constraints 

on the market for such insurance or a dominant role for a 

public plan would constitute a fundamentally governIndividual Mandate; Health Insurance 

Is Largely Governmental

(Tightly Constrained)

Health Insurance Is Largely Private 

(Loosely Constrained)

Subsidies In budget (Outlays or revenue losses) In budget (Outlays or revenue losses)

Play-or-Pay Payments In budget (Revenues) In budget (Revenues)

Individual Mandate Penalties In budget (Revenues) In budget (Revenues)

Risk Adjustment Transactions In budget (Revenues and outlays) In budget (Revenues and outlays)

Transactions of Public Plans In budget (Revenues and outlays) In budget (Net outlays)

Premiums Paid Directly to Insurers In budget (Revenues and outlays) Not in budget

Premiums Paid for EmployerSponsored InsuranceIn budget (Revenues and outlays) Not in budget

Premiums Paid to Exchanges

Exchanges are governmental In budget (Revenues and outlays) In budget (Net outlays)

Exchanges are not governmental In budget (Revenues and outlays) Not in budget
ECONOMIC AND BUDGET ISSUE BRIEF

THE BUDGETARY TREATMENT OF PROPOSALS TO CHANGE THE NATION’S HEALTH INSURANCE SYSTEM 7

mental system, reflecting the exercise of the government’s 

sovereign power. In those situations, premiums appearing 

in the budget—for a public plan or for insurance purchased through exchanges or in the private market—

should be recorded as federal revenues. That determination could apply either to the health insurance market as 

a whole or to just a portion of it (for example, the market 

for individual or small-group insurance). 

In contrast, if there was no mandate or if a mandate was 

imposed in conjunction with an active, loosely restricted 

private market for health insurance, premiums appearing 

in the budget—for a public plan or for insurance purchased through exchanges operated by the government—

would be associated with businesslike transactions and 

should be recorded as offsets to outlays. 

Conclusion 

The bullets below and the table on the facing page 

summarize CBO’s judgments about the appropriate budgetary treatment of various aspects of current proposals to 

change the U.S. health insurance system:

B Premium income—for a public plan (or plans) and for 

insurance purchased through exchanges or in the private market—should be classified as federal revenues if 

there is an individual mandate and tight government 

control of the insurance market. The corresponding 

expenditures should also be recorded as outlays in the 

budget. Similarly, if there is an individual mandate 

and a dominant public plan available to some segments of the insurance market, premiums and outlays 

for those segments of the market should appear in the 

budget, and the premium income should be classified 

as revenues.

B Premium income should be classified as an offset on 

the outlay side of the budget––and the corresponding 

spending counted as outlays—if:

• Premiums are collected for a public plan but there 

is no mandate, or

• There is an individual mandate in conjunction 

with an active, loosely restricted private market, 

and premiums are collected for a public plan or by 

governmental exchanges. 

B Outlays for premiums and income from the receipt 

of those premiums should not appear in the federal 

budget if:

• There is no mandate and no public plan, or

• There is an individual mandate and an active, 

loosely restricted private market, and if premiums 

are paid through nongovernmental exchanges or 

directly to insurers.
CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director

U.S. Congress 

Washington, DC 20515 

October 30, 2009 

Honorable Max Baucus 

Chairman 

Committee on Finance 

United States Senate 

Washington, DC 20510 

Dear Mr. Chairman: 

Current proposals to reform the health care and health insurance systems would affect the 

federal budget and the nation’s spending for health care in many ways, and those effects 

can be summarized using a variety of different measures. This letter aims to clarify the 

measures being used by the Congressional Budget Office (CBO) in its analysis of such 

proposals—in particular, the effects of proposals on federal budget deficits and on the 

magnitude of the federal budgetary commitment to health care. As concrete examples, the 

letter discusses the preliminary analyses recently completed by CBO and the staff of the 

Joint Committee on Taxation (JCT) of the proposal put forward by the Chairman of the 

Senate Committee on Finance, as amended by the committee, and of H.R. 3962, the 

Affordable Health Care for America Act, which was introduced yesterday in the House of 

Representatives.1

The effects of health care reform proposals on the federal budget and national spending 

for health care are only some of the criteria that might be used in evaluating such 

proposals. Their impact on the market for health insurance, sources of insurance 

coverage, the cost of insurance before and after accounting for subsidies, the number of 

people with health insurance, the organization and delivery of health care, the quality and 

cost-effectiveness of health care, and many other factors are likely to weigh on 

policymakers as they make decisions about proposals. Although CBO has analyzed a 

number of those issues, this letter—in response to questions the agency has received—

addresses only the impact on the federal budget.

                                                           

1

 See Congressional Budget Office, letter to the Honorable Max Baucus providing a preliminary analysis of the 

Chairman’s mark for the America’s Healthy Future Act, as amended (October 7, 2009), and letter to the Honorable 

Charles B. Rangel providing a preliminary analysis of H.R. 3962 (October 29, 2009). 
Honorable Max Baucus 

Page 2 

Effects on Federal Budget Deficits 

CBO and JCT’s analysis of a health care reform proposal focuses on its net impact on 

federal budget deficits during the 10-year budget window from 2010 through 2019. This 

“bottom line” reflects all of the effects of a proposal on spending and revenues, 

regardless of whether or how they are related to the provision of health care. For 

example, if an increase in spending on health programs was fully offset by the imposition 

of a new tax that was related to health care, or by cuts in federal spending unrelated to 

health care, the net impact of the proposal on deficits would be zero in either case. CBO 

and JCT estimated that the proposal approved by the Committee on Finance would result 

in a net reduction in federal budget deficits of $81 billion over the 2010–2019 period, and 

that H.R. 3962 would result in a net reduction in federal budget deficits of $104 billion 

over the same period. 

The analyses of those proposals also included an assessment of their long-term effect on 

budget deficits, as requested by many Members. However, detailed year-by-year 

projections, like those that CBO prepares for the 10-year budget window, would not have 

been meaningful because the uncertainties involved are simply too great. CBO therefore 

developed an approach for providing a rough outlook for the decade following the 10-

year budget window; that approach involved grouping the elements of each proposal into 

broad categories, assessing the rate at which the budgetary impact of each of those broad 

categories is likely to increase over time, and summing those impacts. 

For the decade following 2019, CBO concluded that the proposal approved by the Senate 

Committee on Finance would reduce federal budget deficits relative to those projected 

under current law—with a total effect during that decade that is in a broad range between 

one-quarter and one-half percent of gross domestic product (GDP). For that same decade, 

CBO concluded that H.R. 3962 would slightly reduce federal budget deficits relative to 

those projected under current law—with a total effect during that decade that is in a broad 

range between zero and one-quarter percent of GDP. The imprecision of those 

calculations reflects the even greater degree of uncertainty that attends to them compared 

with CBO’s 10-year budget estimates, and the effects of each proposal could fall outside 

of those ranges. 

Following CBO’s standard procedures for estimating the costs of legislation, those 

longer-term projections assumed that the proposals were enacted and remained 

unchanged throughout the next two decades, which is often not the case for major 

legislation. (For example, the sustainable growth rate mechanism governing Medicare’s 

payments to physicians has frequently been modified to avoid reductions in those 

payments, and legislation to do the same again is currently being discussed in the 

Congress.) These proposals would put into effect (or leave in effect) a number of 

procedures that might be difficult to maintain over a long period of time. In particular, 

they would allow Medicare’s payment rates for physicians’ services to drop sharply for 
Honorable Max Baucus 

Page 3 

much of the coming decade, and they aim to achieve substantial long-term savings 

through constraints on the payment rates for other providers of Medicare services. 

Effects on the Federal Budgetary Commitment to Health Care 

CBO’s letters providing preliminary analyses of the proposal approved by the Senate 

Committee on Finance and H.R. 3962 also addressed the effects of the proposals on “the 

federal budgetary commitment to health care.” CBO used that phrase in a letter earlier 

this year to describe the sum of net federal outlays for health programs and tax 

preferences for health care.2

 The letter noted that this sum would be greater than $1 

trillion in fiscal year 2009: Net federal outlays for Medicare and Medicaid would be 

about $700 billion; tax preferences for health care—commonly called tax expenditures—

would amount to more than $250 billion (primarily through the exclusion of premiums 

for employment-based health insurance from income and payroll taxes); and the federal 

government would also pay for veterans’ health care, public health initiatives, and other 

health programs.3

CBO has used this measure because some Members have expressed interest in the federal 

government’s overall role in the financing of health care—both under current law and 

under alternative reform proposals. (Whether the federal role should be expanded, 

contracted, or held the same is a policy choice, and CBO, as always, makes no policy 

recommendations.) Federal outlays for health programs are not an adequate gauge of that 

overall role because tax expenditures for health care are substantial under current law and 

because new tax credits to help purchase health insurance are a significant part of some 

reform proposals. Similarly, federal tax expenditures for health care do not, by 

themselves, capture this overall role because federal spending on health care is also 

substantial under current law and because such spending would increase significantly 

under some reform proposals. By including both the federal government’s spending for 

health care and the subsidies for health care that are conveyed through reductions in 

federal taxes, the “federal budgetary commitment to health care” represents a broad 

measure of the resources allocated by the federal government in this area—and a measure 

that is independent of the extent to which outlays or tax provisions are used to channel 

those resources. 

                                                           

2

 See Congressional Budget Office, “Health Care Reform and the Federal Budget,” attachment to a letter to the 

Honorable Kent Conrad and the Honorable Judd Gregg (June 16, 2009). 

3 Net federal outlays for Medicare include both spending and offsetting receipts for that program. The latter consist 

of: premiums for Part A (which are paid only by individuals who, on the basis of their work history or the work 

history of a spouse, are not entitled to coverage); premiums for Part B (which cover about 25 percent of the cost of 

Part B); premiums for Part D that are withheld from Social Security benefits (but not premiums that enrollees pay 

directly to their Part D plans); Part D payments by states (based on the costs that were transferred from Medicaid to 

Medicare when Part D was established); and amounts paid to providers and subsequently recovered.
Honorable Max Baucus 

Page 4 

Proposal Approved by the Senate Committee on Finance. How would the proposal 

approved by the Senate Finance Committee affect the federal budgetary commitment to 

health care? (The attached table provides a summary for the 2010–2019 period.) In 

assessing that proposal, CBO reported that the gross cost of the coverage expansions 

(including increases in both outlays and tax expenditures) would be about $829 billion 

during the 10-year budget window. That figure includes the credits and subsidies 

provided through new insurance exchanges, increased net outlays for Medicaid and the 

Children’s Health Insurance Program (CHIP), and tax credits for small employers.4

 The 

proposal also includes the following other significant changes to federal policies that 

would tend to offset that cost and thereby reduce its effect on the sum of net federal 

outlays and tax preferences for health care: 

 

 Reductions in net spending for Medicare, Medicaid, CHIP, and other federal 

health programs other than the changes associated directly with expanded 

insurance coverage (roughly $404 billion);5

 

 Revenues generated by the excise tax on high-premium insurance plans, which is 

effectively a reduction in existing tax expenditures for health insurance premiums 

(roughly $201 billion); and 

 

 Changes to existing law regarding tax expenditures for health care and effects of 

other provisions on those tax expenditures (roughly $138 billion).6

Accounting for all of those changes, CBO and JCT’s estimates imply that the proposal 

would increase the federal budgetary commitment to health care by about $85 billion 

over the 2010–2019 period. 

                                                           

4

 Under the Finance Committee’s proposal, many of the subsidies for insurance coverage would be provided in the 

form of refundable tax credits. To the extent that those credits would reduce enrollees’ tax liability, they would 

represent tax expenditures; any amounts in excess of that liability (that is, the portion that is refundable) would be 

treated as outlays for budgetary purposes. JCT has indicated that roughly three-quarters of the total amount of 

credits under this plan would be outlays. 

5

 The reductions in net spending for those programs could themselves be divided into provisions that would increase 

spending (and thus the federal budgetary commitment to health care) and provisions that would decrease spending 

(and thus that commitment). However, even some individual provisions of the proposal have elements that raise 

costs and elements that lower costs. Tabulating all of the aspects of the proposal that would, in isolation, increase 

federal outlays would be complicated and would require somewhat arbitrary judgments about how to allocate 

interactions among different elements of individual provisions and interactions among provisions. 

6

 That figure is the sum of roughly $86 billion (the revenue component of the line labeled “Other Effects on Tax 

Revenues and Outlays” in the table “Preliminary Analysis of the Insurance Coverage Provisions” enclosed with the 

October 7 letter to the Honorable Max Baucus); roughly $41 billion (the sum of provisions related to tax 

expenditures for health care estimated by JCT and shown in JCX-41-09); and roughly $12 billion (the sum of 

provisions labeled “Effect on Revenues of Changes in Health Insurance Premiums” on page 8 of the table 

“Preliminary Estimate for Title I, Subtitle F, Through Title V of the Chairman’s Mark, as Amended” enclosed with 

the October 7 letter to the Honorable Max Baucus). 
Honorable Max Baucus 

Page 5 

The proposal includes still other provisions that would not affect the government’s 

outlays or tax expenditures for health care—and thus not affect the federal budgetary 

commitment to health care—but that would reduce budget deficits by about $167 billion 

over the next 10 years. Most of that amount would result from penalty payments by 

employers and uninsured individuals and from new fees imposed on providers of health 

insurance and on manufacturers and importers of brand-name drugs and certain medical 

devices. Although those types of revenues are related to health care, they do not represent 

tax preferences for health care and therefore do not affect the federal budgetary 

commitment to health care as CBO uses the term; rather, they are means of paying for an 

expanded commitment. Putting together the roughly $85 billion increase in the budgetary 

commitment to health care and the roughly $167 billion in deficit reduction from other 

provisions yields an estimated net reduction of roughly $81 billion in budget deficits 

between 2010 and 2019, as noted above. 

By CBO’s estimate, the Finance Committee’s proposal would increase the federal 

budgetary commitment to health care by about $11 billion in 2019; but in subsequent 

years, the effects of the proposal that would tend to reduce that commitment would grow 

faster than those that would increase it. As a result, the net increase in the government’s 

commitment to health care near the end of the 10-year budget window would turn into a 

net decrease during the subsequent decade, when the proposal would reduce the sum of 

net federal outlays and tax expenditures for health care (relative to the amounts 

anticipated under current law). CBO’s October 7 letter describing the preliminary 

analysis of the proposal approved by the Committee on Finance presented that conclusion 

about the longer-term impact along with CBO’s overall assessment of the proposal’s 

effects on budget deficits during that decade. 

The approach taken here to categorizing and displaying the effects of provisions in the 

Finance Committee’s proposal differs from the presentation used in CBO and JCT’s 

preliminary analysis of October 7. In that earlier analysis, the agencies grouped the 

provisions directly related to the expansions of insurance coverage, the provisions 

making other changes to direct spending (primarily to the Medicare program), and the 

provisions generating other changes in revenues. That approach seemed useful in 

describing the overall contours of the proposal; however, it did not separate the aspects of 

the proposal affecting federal expenditures and tax expenditures for health care from the 

aspects of the proposal making other changes in federal policy, which is the objective of 

this letter. Of course, the way in which the budgetary effects of various provisions are 

combined and displayed has no effect on the estimated net impact of the proposal on 

budget deficits. 

H.R. 3962. In assessing the bill introduced yesterday in the House, CBO reported that the 

gross cost of the coverage expansions (including increases in both outlays and tax 

expenditures) would be about $1,055 billion during the 2010–2019 period. As with the 
Honorable Max Baucus 

Page 6 

proposal approved by the Senate Finance Committee, that figure includes the subsidies 

provided through new insurance exchanges, increased net outlays for Medicaid and 

CHIP, and tax credits for small employers. The bill also includes the following other 

significant changes to federal policies that would tend to offset that cost and thereby 

reduce the effect of the proposal on the sum of net federal outlays and tax expenditures 

for health care: 

 

 Reductions in net spending for Medicare, Medicaid, CHIP, and other federal 

health programs other than the changes associated directly with expanded 

insurance coverage (about $426 billion); and 

 

 Changes to existing law regarding tax expenditures for health care and effects of 

other provisions on those tax expenditures (roughly $32 billion).7

Accounting for all of those changes, CBO and JCT’s estimates indicate that H.R. 3962 

would increase the federal budgetary commitment to health care by about $598 billion 

over the 2010–2019 period (see the attached table). 

The proposal would nevertheless reduce budget deficits over the next 10 years because it 

includes other provisions that would not affect the government’s outlays or tax 

expenditures for health care—and thus would not affect the federal budgetary 

commitment to health care—but that would diminish deficits by about $701 billion. Most 

of that amount would result from an income tax surcharge on high-income individuals, 

from penalty payments by employers and uninsured individuals, and from other revenue 

provisions. Although some of those revenues are related to health care, they do not 

represent tax preferences for health care, so CBO treats them instead as means of paying 

for an expanded federal budgetary commitment to health care. In combination, the 

increase of about $598 billion in the budgetary commitment to health care and the deficit 

reduction of about $701 billion from other provisions yield the estimated net reduction of 

about $104 billion in budget deficits between 2010 and 2019 noted above. 

By CBO’s estimate, H.R. 3962 would increase the federal budgetary commitment to 

health care by about $104 billion in 2019. The legislation would also increase the federal 

budgetary commitment to health care (relative to that under current law) in the decade 

after 2019, as explained in CBO’s October 29 letter describing the preliminary analysis of 

the bill. 

                                                           

7

 That figure is the sum of -$4 billion (the revenue component of the line labeled “Other Effects on Tax Revenues 

and Outlays” in Table 2, “Preliminary Analysis of the Insurance Coverage Provisions,” in the October 29 letter to 

the Honorable Charles B. Rangel); $21 billion (the sum of provisions related to tax expenditures for health care 

estimated by JCT and shown in JCX-43-09); and $14 billion (all but the first provision on page 10 of Table 3, 

“Preliminary Estimate of the Effects on Direct Spending and Revenues of Divisions B, C, and D and Sections 111, 

115, and 346 of H.R. 3962,” in the October 29 letter to the Honorable Charles B. Rangel). 
Honorable Max Baucus 

Page 7 

“Bending the Curve” 

The question often arises: How does CBO evaluate whether health care reform proposals 

“bend the curve”? But that question raises another one: Which curve? Several cost trends 

are of interest to policymakers, and even though they are related, proposals might not 

have the same effects on each one. One such curve is the federal budget deficit as a 

whole, and another is the federal budgetary commitment to health care. A third is the 

trajectory of national health expenditures (NHE), and a fourth might be the premiums 

charged for health insurance. 

Moreover, what does it mean to “bend the curve”? If a proposal makes the expected 

budget deficit 20 years from now smaller than it is expected to be without any policy 

changes, then the deficit curve is clearly being bent downward, on average, during the 

next 20 years; that is, the average growth rate of the deficit during those two decades 

would be lower. On the other hand, if the expected deficit is larger, then the deficit curve 

is being bent upward, and the average growth rate of the deficit in that period would be 

higher. Would that slower or faster growth rate continue indefinitely? That sort of 

extrapolation might seem natural, but it may not be appropriate. Distinguishing between a 

series of shifts in the level of the deficit and permanent changes in the growth rate of the 

deficit is difficult. Although CBO can provide a rough indication of a proposal’s effect on 

the level of the budget deficit 20 years ahead, the agency does not have an analytic basis 

for projecting the proposal’s effect on the growth rate of the deficit at that point, much 

less for evaluating whether that growth rate will continue in future years. Those same 

considerations apply to the agency’s analysis of the federal budgetary commitment to 

health care. Therefore, CBO has concluded that it is more appropriate to talk about 

whether proposals would “lower” or “raise” the curve of the federal budget deficit or 

budgetary commitment to health care 10 to 20 years from now than to discuss those 

proposals’ effects on the shape of the curve in that time period or the level or slope of the 

curve beyond that period. 

Major proposals to reform health care would affect not only the federal budget but also 

spending for health care by individuals, firms, and other levels of government. A broad 

measure encompassing those effects would be the impact on total national health 

expenditures. However, CBO does not analyze NHE as closely as it does the federal 

budget, and at this point CBO has not assessed the net effect of health care reform 

proposals on those expenditures, either within the 10-year budget window or for the 

subsequent decade.8

 That is, CBO has not evaluated whether reform proposals would 

lower or raise—or bend down or up—the “curve” of national health expenditures. 

                                                           

8

 Projections of NHE are produced annually by the Office of the Actuary in the Centers for Medicare & Medicaid 

Services. 
Honorable Max Baucus 

Page 8 

Finally, the question of what impact proposals might have on health insurance premiums 

is also of considerable interest. CBO intends to address that issue in the near future. 

I hope this discussion is helpful in your consideration of proposals for broad changes in 

the nation’s health care and health insurance systems. 

 Sincerely, 

 Douglas W. Elmendorf 

Director 

Enclosure 

cc: Honorable Chuck Grassley 

 Ranking Member 

 Honorable Kent Conrad 

 Chairman 

 Committee on the Budget 

 Honorable Judd Gregg 

 Ranking Member 

Identical letters sent to the Honorable Tom Harkin, the Honorable George Miller, the 

Honorable Henry A. Waxman, and the Honorable Charles B. Rangel. 
CBO’S ESTIMATE OF THE CHANGE IN THE FEDERAL GOVERNMENT’S BUDGETARY 

COMMITMENT TO HEALTH CARE UNDER TWO PROPOSALS, FISCAL YEARS 2010-2019 

(Billions of dollars)

 

 Senate Finance 

Committee’s 

Proposal a

 

H.R. 3962 b

 

Changes in the Federal Budgetary Commitment 

to Health Care 

 

 Gross Cost of Expanded Insurance Coverage 829 1,055

 

 Changes in Net Spending for Medicare, Medicaid, 

and Other Programs -404 -426

 

 Changes in Revenues from Tax on High-Premium 

Insurance Plans -201 0

 

 Other Changes in Existing Tax Expenditures -138 -32

 

 Net Change in the Federal Budgetary 

Commitment to Health Care 85 598

 

Other Budgetary Effects 

 

 Penalty Payments by Firms and Individuals -27 -167

 

 Revenues from Other Changes to Tax Law -139 -536

 

 Miscellaneous Other Budgetary Effects -1 2

 

 Net Impact on Federal Budget Deficits -81 -104

Source: Congressional Budget Office. 

a. The Chairman’s mark for the America’s Healthy Future Act, as amended by the Senate Committee on Finance. 

 

b. The Affordable Health Care for America Act, as introduced on October 29, 2009. 

Notes: Positive numbers indicate increases in the deficit, and negative numbers indicate reductions in the deficit. 

 

 Components may not sum to totals because of rounding. 

 

 For further details, see Congressional Budget Office, letter to the Honorable Max Baucus providing a preliminary 

analysis of the Chairman’s mark for the America’s Healthy Future Act, as amended (October 7, 2009), and letter to the 

Honorable Charles B. Rangel providing a preliminary analysis of H.R. 3962 (October 29, 2009). 
Budgetary Treatment of Proposals to Regulate Medical Loss Ratios

CBO has been asked to review a proposal that would require health insurers to provide rebates to 

enrollees to the extent that their medical loss ratios are less than 90 percent. (A medical loss ratio, or 

MLR, is the proportion of premium dollars that an insurer spends on health care; it is commonly 

calculated as the amount of claims incurred plus changes in reserves as a fraction of premiums earned.) 

In particular, CBO has been asked to assess whether adding such a requirement to the provisions of the 

Patient Protection and Affordable Care Act (PPACA) put forward by Senator Reid (as an amendment to 

H.R. 3590) would change its judgment as to how various types of health insurance transactions that 

would occur under that legislation should be reflected in the federal budget. 

In May, CBO released an issue brief entitled The Budgetary Treatment of Proposals to Change the 

Nation’s Health Insurance System. That publication identified the primary elements of proposals that 

CBO thought were relevant to whether purchases of private health insurance should be treated as part 

of the federal budget. CBO concluded (on page 4) that “at its root, the key consideration is whether the 

proposal would be making health insurance an essentially governmental program, tightly controlled by 

the federal government with little choice available to those who offer and buy health insurance—or 

whether the system would provide significant flexibility in terms of the types, prices, and number of 

private-sector sellers of insurance available to people.” (Note: CBO estimates the budgetary impact of 

legislation as it is being considered by the Congress; if legislation is enacted into law, the 

Administration’s Office of Management and Budget ultimately determines how its effects will be 

reflected in the federal budget.)

The PPACA would make numerous changes to the market for health insurance, including requiring all 

individuals to purchase health insurance, subsidizing coverage for some individuals, and establishing 

standards for benefit packages. Taken together, those changes would significantly increase the federal 

government’s role in that market. Nevertheless, CBO concluded that there would remain sufficient 

flexibility for providers of insurance and sufficient choice for purchasers of insurance that the insurance 

market as a whole should be considered part of the private sector. Therefore, except for certain 

transactions that explicitly involve the government, CBO would treat the cash flows associated with the 

health insurance system (for example, premium and benefit payments) as nongovernmental.

Certain policies governing MLRs, particularly those requiring health plans whose MLR falls below a 

minimum level to rebate the difference to enrollees, can be a powerful regulatory tool. Insurers 

operating at MLRs below such a minimum would have a limited number of possible responses. They

could change the way they provide health insurance, perhaps by reducing their profits or cutting back on 

efforts to restrain benefit costs through care management. They could choose to pay the rebates, but if 

they raised premiums to cover the added costs they would simply have to rebate that increment to 

premiums later. Alternatively, they could exit the market entirely. Such responses would reduce the 

types, range of prices, and number of private-sector sellers of health insurance—the very flexibilities 

described in CBO’s issue brief.
In CBO’s judgment, an important consideration in whether a specific MLR policy would cause such 

market effects is the fraction of health insurance issuers for whom the policy would be binding. A policy 

that affected a majority of issuers would be likely to substantially reduce flexibility in terms of the types, 

prices, and number of private sellers of health insurance. Taken together with the significant increase in 

the federal government’s role in the insurance market under the PPACA, such a substantial loss in 

flexibility would lead CBO to conclude that the affected segments of the health insurance market should 

be considered part of the federal budget. (CBO made similar judgments in its issue brief in assessing the

level of required coverage that would, in combination with a mandate to purchase coverage, make the 

purchase of insurance essentially governmental.) 

Setting a precise minimum MLR that would trigger such a determination under the PPACA is difficult, 

because MLRs fall along a continuum. However, CBO has identified MLRs in the principal segments of 

the insurance market above which a significant minority of insurers would be affected; if a minimum 

MLR were set at or below those levels, CBO would not consider purchases of private health insurance to 

be part of the federal budget. Compared with MLRs anticipated under current law, MLRs under the 

PPACA would tend to be similar in the large-group market, slightly higher in the small-group market, and 

noticeably higher in the individual (nongroup) market—for reasons that are discussed in CBO’s 

November 30 analysis of the effect of Senator Reid’s proposal on insurance premiums. Taking those 

differences into account, CBO has determined that setting minimum MLRs under the PPACA at 80 

percent or lower for the individual and small-group markets or at 85 percent or lower for the largegroup market would not cause CBO to consider transactions in those markets as part of the federal 

budget. 

A proposal to require health insurers to provide rebates to their enrollees to the extent that their 

medical loss ratios are less than 90 percent would effectively force insurers to achieve a high medical 

loss ratio. Combining this requirement with the other provisions of the PPACA would greatly restrict 

flexibility related to the sale and purchase of health insurance. In CBO’s view, this further expansion of 

the federal government’s role in the health insurance market would make such insurance an essentially 

governmental program, so that all payments related to health insurance policies should be recorded as 

cash flows in the federal budget.

 Congressional Budget Office

 December 13, 2009

 
CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director

U.S. Congress

Washington, DC 20515

January 22, 2010 

Honorable Jeff Sessions 

United States Senate

Washington, DC 20510 

Dear Senator:

This letter responds to questions you posed about the Congressional Budget 

Office’s (CBO’s) analysis of the effects of H.R. 3590, the Patient Protection and 

Affordable Care Act (PPACA), as passed by the Senate on December 24. In 

particular, you asked for clarification on several issues regarding the effect of the 

legislation on the Hospital Insurance (HI) trust fund, from which Medicare Part A 

benefits are paid.

Your questions focused on the budgetary impact of the provisions of PPACA that 

would extend the solvency of the HI trust fund, presumably either by increasing 

revenues to or decreasing expenditures from that trust fund. Some specific 

provisions of PPACA can be identified as having such effects. However, some of 

those provisions would have effects beyond the HI trust fund (such as provisions 

addressing Medicare Advantage plans, which are paid for from both the trust fund 

and the Treasury’s general fund), and other provisions in the act would affect the 

trust fund indirectly through their impact on taxable income. Because of those 

complexities, this letter does not address the possible impact of removing from 

the act all of the provisions that would affect the HI trust fund, but, rather, 

summarizes the net effects of the act as a whole on the trust fund. 

Budgetary Impact of the Legislation 

On the basis of the economic forecast and technical assumptions in CBO’s March 

2009 baseline, CBO projected that, under current law, the HI trust fund would be 

exhausted—that is, the balance of the trust fund would decline to zero—during 

fiscal year 2017. Enacting PPACA, including the manager’s amendment, would 

reduce net outlays for Part A of Medicare by $245 billion over the 2010–2019 

period relative to that baseline, CBO estimates. Enacting that legislation would 

also increase HI payroll tax receipts by about $113 billion over that period, 

according to estimates by CBO and the staff of the Joint Committee on Taxation 

(JCT). Together, those changes in outlays and revenues would diminish budget 

deficits and add to trust fund balances by $358 billion over that 10-year period. 

Given those changes in the financial flows of the trust fund, CBO estimates that 

the HI trust fund would have a positive balance of about $170 billion at the end of 

fiscal year 2019. 
In the December 19, 2009, cost estimate for PPACA, CBO and JCT estimated that 

the direct spending and revenue effects of enacting PPACA would yield a net 

reduction in federal deficits of $132 billion over the 2010–2019 period.1 Thus, the 

act’s effects on the rest of the budget—other than the cash flows of the HI trust 

fund—would amount to a net increase in federal deficits of $226 billion over the 

same period. Those two aspects of the legislation would have differing effects on 

debt held by the public: The changes to HI revenues and costs, by themselves, 

would reduce that debt, while changes in other revenues and costs would increase 

it. 

For the decade beyond 2019, CBO expects that enacting PPACA would reduce 

federal budget deficits relative to those projected under current law—with a total 

effect during that decade in a broad range between one-quarter percent and onehalf percent of gross domestic product.2

 The legislation would have positive 

effects on the cash flows of the HI trust fund in that decade that would be larger 

than its effects on federal budget deficits as a whole. Therefore, leaving aside the 

cash flows of the HI trust fund, CBO expects that PPACA would yield a net 

increase in budget deficits during the decade beyond 2019. 

Trust Fund Accounting

However, the HI trust fund, like other federal trust funds, is essentially an 

accounting mechanism. In a given year, the sum of specified HI receipts and the 

interest that is credited on the previous trust fund balance, minus spending for 

Medicare Part A benefits, represents the surplus (or deficit, if the latter is greater) 

in the trust fund for that year. Any cash generated when there is an excess of 

receipts over spending is not retained by the trust fund; rather, it is turned over to 

the Treasury, which provides government bonds to the trust fund in exchange and 

uses the cash to finance the government’s ongoing activities. 

The HI trust fund is part of the federal government, so transactions between the 

trust fund and the Treasury are intragovernmental and have no net impact on the 

unified budget or on federal borrowing from the public. From a unified budget 

perspective, any increase in revenues or decrease in outlays in the HI trust fund 

represents cash that can be used to finance other government activities without 

requiring new government borrowing from the public. Similarly, any increase in 

outlays or decrease in revenues in the HI trust fund in some future year represents 

1 Congressional Budget Office, letter to the Honorable Harry Reid regarding the direct spending

and revenue effects of the Patient Protection and Affordable Care Act (December 19, 2009). CBO 

has not prepared an estimate of the budgetary impact of PPACA as passed by the Senate; the 

estimates used in this letter apply to the bill as introduced, incorporating the manager’s 

amendment but no other amendments. The relevant figures for the Senate-passed version of the 

legislation would not differ significantly.

2 Congressional Budget Office, letter to the Honorable Harry Reid regarding an error in the cost 

estimate released on December 19 (December 20, 2009).
a draw on the government’s cash in that year. Thus, the resources to redeem 

government bonds in the HI trust fund and thereby pay for Medicare benefits in 

some future year will have to be generated from taxes, other government income, 

or government borrowing in that year. The HI trust fund and other trust funds 

have important legal meaning but little economic or budgetary meaning.

The reductions in projected Part A outlays and increases in projected HI revenues 

resulting from PPACA would significantly raise balances in the HI trust fund and 

might suggest that significant additional resources—$358 billion plus additional 

interest to be credited to the trust fund over time—had been set aside to pay for 

future Medicare benefits. However, only the additional savings by the government 

as a whole truly increase the government’s ability to pay for future Medicare 

benefits or other programs, and those would be a much smaller ($132 billion plus 

interest savings to be achieved over time). Unified budget accounting shows that 

the majority of the HI trust fund savings under PPACA would be used to pay for 

other spending and therefore would not enhance the ability of the government to 

pay for future Medicare benefits. 

Impact on Federal Debt

You also asked about the impact of PPACA on gross federal debt. Gross federal 

debt consists of debt held by the public and debt issued to government accounts. 

Debt held by the public is the most meaningful measure for assessing the 

relationship between federal debt and the economy because it represents the 

amount that the government has borrowed in the financial markets to pay for its 

operations and activities; such borrowing competes with other participants in 

credit markets for financial resources. In contrast, debt held by trust funds and 

other government accounts represents internal transactions of the government and 

thus has no effect on credit markets. 

Compared with the effects of current law, enacting PPACA would increase the 

balance in the HI trust fund at the end of 2019 by somewhat more than $358 

billion ($358 billion in increased revenues and reduced outlays, described above, 

plus interest earnings on the larger balances during the 2009–2019 period). 

Balances in the HI trust fund are generally held in the form of government debt. 

Therefore, the HI trust fund would hold more than $358 billion of additional 

government debt by the end of 2019 compared with its holdings under current 

law. At the same time, enacting PPACA would reduce debt held by the public at 

the end of 2019 by somewhat more than $132 billion ($132 billion in increased 

revenues and reduced direct spending, plus interest savings from the smaller debt 

during the 10-year period). Therefore, enacting PPACA would increase debt held 

by government accounts more than it would decrease debt held by the public, and 

would thus increase gross federal debt.3

3 Because interest rates on debt held by the public and debt held by government accounts are not 

too dissimilar, accounting explicitly for the difference in interest costs between the HI trust fund 

and the unified government accounts would not affect this qualitative conclusion.

 However, that measure of debt conveys 
little information about the federal government’s future financial burdens and has 

little economic meaning. In contrast, the effects of legislation on debt held by the 

public offer a more useful measure of that legislation’s impact on the 

government’s financial condition. 

I hope this information is useful to you. If you have any questions, please contact 

me.

 Sincerely,

 Douglas W. Elmendorf 

 Director

cc: Honorable Harry Reid

Majority Leader

 Honorable Mitch McConnell

Republican Leader

 Honorable Max Baucus 

Chairman

Committee on Finance

 Honorable Chuck Grassley 

 Ranking Member 

 Honorable Tom Harkin 

Chairman

 Committee on Health, Education, Labor, and Pensions 

 Honorable Michael B. Enzi 

 Ranking Member 

 Honorable Kent Conrad 

Chairman

 Committee on the Budget 

 Honorable Judd Gregg 

 Ranking Member 
Medical Malpractice

One of the issues that arose in the debate over health care legislation was whether to limit payments related to medical malpractice—also known as “tort reform.” CBO produced several 

letters analyzing that issue: 

1. A letter to Senator Orrin G. Hatch, dated October 9, 2009, updating CBO’s estimates of 

the impact that certain proposed changes would have on spending for health care and the 

federal budget. 

2. A letter to Senator John D. Rockefeller IV, dated December 10, 2009, addressing questions about how recent studies about medical malpractice had affected CBO’s analysis and 

whether tort reform would have a negative effect on patients’ health. 

3. A letter to Representative Bruce L. Braley, dated December 29, 2009, addressing many of 

the same questions as the letter to Senator Rockefeller but also including a discussion of 

the impact of certain proposals on premiums for malpractice insurance. 

www.cbo.gov 

CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director 

U.S. Congress 

Washington, DC 20515 

October 9, 2009 

Honorable Orrin G. Hatch 

United States Senate 

Washington, DC 20510 

Dear Senator: 

This letter responds to your request for an updated analysis of the effects of proposals to 

limit costs related to medical malpractice (“tort reform”). Tort reform could affect costs 

for health care both directly and indirectly: directly, by lowering premiums for medical 

liability insurance; and indirectly, by reducing the use of diagnostic tests and other health 

care services when providers recommend those services principally to reduce their 

potential exposure to lawsuits. Because of mixed evidence about whether tort reform 

affects the utilization of health care services, past analyses by the Congressional Budget 

Office (CBO) have focused on the impact of tort reform on premiums for malpractice 

insurance. However, more recent research has provided additional evidence to suggest 

that lowering the cost of medical malpractice tends to reduce the use of health care 

services. CBO has updated its estimate of the budgetary effects of proposals for tort 

reform to reflect that new information. 

Background on Tort Reform 

Under current law, individuals may pursue civil claims against physicians and other 

health care providers for alleged torts—breaches of duty that result in personal injury. 

The system has twin objectives: deterring negligent behavior on the part of providers and 

compensating claimants for losses they incur (including medical costs, lost wages, and 

pain and suffering) resulting from injuries that occur because of negligence. 

Many observers have proposed nationwide curbs on medical malpractice torts. As CBO 

outlined in its 2008 report Key Issues in Analyzing Major Health Insurance Proposals, 

reforms to the tort system generally fall into one of two categories: caps on the payments 

that may be made and limits on who may be found liable. Broader reforms, such as the 

establishment of specialized courts or different standards of evidence, have also been 

discussed, but they have not featured as prominently in legislative proposals. 

Caps on tort awards could take a number of forms. One common proposal would limit 

awards for noneconomic damages, such as pain and suffering. Other proposals would 

limit the amount awarded for punitive damages, or the situations in which a plaintiff 

could receive awards for punitive damages, or both. Still other proposals would cap the 

contingency fees that claimants’ attorneys could collect as a percentage of the total 
Honorable Orrin G. Hatch 

Page 2 

damages recovered. Additionally, some proposals would allow compensation that 

plaintiffs received from other sources—including payments from health and life 

insurance, workers’ compensation, and automobile insurance—to be introduced at trials 

(juries presumably would take that information into account in determining awards); 

some proposals would also prevent those other sources from receiving any portion of 

awards for damages. 

The two most common ways of imposing limits on liability are to shorten the statute of 

limitations on malpractice claims and to change the rules regarding joint-and-several 

liability. The principle of joint-and-several liability allows a claimant to recover the entire 

amount of a damage award from any one of the parties found to be responsible for an 

injury, regardless of the party’s degree of responsibility for that injury. Replacing jointand-several liability with a “fair-share” rule would limit each defendant’s financial 

liability to his or her percentage share of responsibility for the injury. 

Several times over the past decade, CBO has estimated the effects of legislative tort 

reform proposals. Typical proposals have included: 

 A cap of $250,000 on awards for noneconomic damages; 

 A cap on awards for punitive damages of $500,000 or two times the award for 

economic damages, whichever is greater; 

 Modification of the “collateral source” rule to allow evidence of income from 

such sources as health and life insurance, workers’ compensation, and automobile 

insurance to be introduced at trials or to require that such income be subtracted 

from awards decided by juries; 

 A statute of limitations—one year for adults and three years for children—from 

the date of discovery of an injury; and 

 Replacement of joint-and-several liability with a fair-share rule, under which a 

defendant in a lawsuit would be liable only for the percentage of the final award 

that was equal to his or her share of responsibility for the injury. 

The Effect of Tort Reform on Premiums for Medical 

Liability Insurance 

National implementation of a package of proposals similar to the preceding list would 

reduce total national premiums for medical liability insurance by about 10 percent, CBO 

now estimates. That figure reflects the fact that many states have already enacted at least 

some of the proposed reforms. For example, about one-third of the states have 

implemented caps on noneconomic damages, and about two-thirds have reformed their 

rules regarding joint-and-several liability. 

CBO estimates that the direct costs that providers will incur in 2009 for medical 

malpractice liability—which consist of malpractice insurance premiums together with 

settlements, awards, and administrative costs not covered by insurance—will total 

approximately $35 billion, or about 2 percent of total health care expenditures. Therefore, 
Honorable Orrin G. Hatch 

Page 3 

lowering premiums for medical liability insurance by 10 percent would reduce total 

national health care expenditures by about 0.2 percent. 

Recent Evidence on the Broader Effects of Tort Reform 

On the basis of newly available research, CBO has updated its analysis of the effects of 

tort reform to include not only direct savings from lower premiums for medical liability 

insurance but also indirect savings from reduced utilization of health care services. Many 

analysts surmise that the current medical liability system encourages providers to 

increase the volume or intensity of the health care services they provide to protect 

themselves against possible lawsuits. (An example of increasing intensity would be 

ordering a computerized tomography scan rather than a simple x-ray.) In earlier analyses, 

CBO did not incorporate such effects in its estimates because research on the impact of 

tort reform on the use of health care services produced inconsistent results. For example, 

Kessler and McClellan (1996) and CBO (2006) both observed reductions in Medicare’s 

hospital spending in states that had enacted a cap on noneconomic damages (for the full 

citations, see the attached list of references); however, those studies also reported 

increases in Medicare’s spending for hospitals and for physicians’ services in states that 

had changed their joint-and-several liability rules to fair-share rules. 

More recent research has yielded additional evidence that tort reform reduces the use of 

health care services. Lakdawalla and Seabury (2009) and Baicker, Fisher, and Chandra 

(2007), using data on hospitals’ total expenditures and Medicare’s spending for Part A 

and Part B services, found that reductions in the cost of medical liability lowered health 

care expenditures.1

 In addition, Avraham, Dafny, and Schanzenbach (2009) found that 

several types of reform significantly lowered the costs of health plans offered by selfinsured employers. 

Other recent research seeks to reconcile some earlier results that appeared to be 

contradictory. Currie and MacLeod (2008) have suggested that certain components of tort 

reform, such as changes in the rules on joint-and-several liability, create different 

financial incentives for physicians than do other reform components, such as caps on 

noneconomic damages. Caps on damages unambiguously reduce financial liability for all 

providers. Reform of joint-and-several liability rules, however, is likely to increase the 

financial liability of the providers assigned the greatest share of responsibility in 

malpractice cases—typically, physicians. Therefore, physicians may reduce the volume 

and intensity of the services they provide in response to caps on damages, but they may 

increase volume and intensity in response to reform of joint-and-several liability rules. As 

a result, the inclusion or exclusion of specific components in a legislative tort reform 

proposal could affect the proposal’s likely impact on health care spending. 

The Effects of Tort Reform on Total Health Care Spending and the 

Federal Budget 

CBO now estimates, on the basis of an analysis incorporating the results of recent 

research, that if a package of proposals such as those described above was enacted, it 

would reduce total national health care spending by about 0.5 percent (about $11 billion 

in 2009). That figure is the sum of the direct reduction in spending of 0.2 percent from 

 

1 Part A of Medicare pays for hospital care and related services; Part B pays for care by physicians and 

related services.
Honorable Orrin G. Hatch 

Page 4 

2010- 2010-

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2014 2019

0 -0.7 -1.8 -3.2 -4.6 -5.4 -5.9 -6.0 -6.3 -7.0 -10.3 -41.0

0 0.2 0.6 1.0 1.5 1.7 1.8 1.9 2.1 2.2 3.2 13.0

0 -0.9 -2.4 -4.2 -6.1 -7.1 -7.7 -7.9 -8.4 -9.2 -13.5 -54.0

Sources: Congressional Budget Office; Joint Committee on Taxation.

a.

not include potential effects on payments made through the Federal Tort Claims Act and effects on other, small mandatory programs.

b. Negative numbers indicate a reduction in the deficit. 

Includes Medicare, Medicaid, the Children's Health Insurance Program, and the Federal Employees Health Benefits program. Numbers do

Table 1.

Change in Mandatory Spending

a

Change in Revenues

(Billions of dollars)

Effects of Tort Reform on Mandatory Spending and Tax Revenues 

Total

Net Effect on the Deficitb

lower medical liability premiums, as discussed earlier, and an additional indirect 

reduction of 0.3 percent from slightly less utilization of health care services. (That 

reduction is the estimated net effect of the entire package listed earlier, although some 

components of that package might increase the utilization of physicians’ services, as has 

already been noted.) CBO’s estimate takes into account the fact that because many states 

have already implemented some of the changes in the package, a significant fraction of 

the potential cost savings has already been realized. 

In the case of the federal budget, enactment of such a package of proposals would reduce 

mandatory spending for Medicare, Medicaid, the Children’s Health Insurance Program, 

and the Federal Employees Health Benefits program by roughly $41 billion over the next 

10 years (see Table 1).2

 That figure includes a larger percentage decline in Medicare’s 

spending than in the other programs’ or in national health spending in general, a 

calculation based on empirical evidence showing that the impact of tort reform on the 

utilization of health care services is greater for Medicare than for the rest of the health 

care system. One possible explanation for that disparity is that the bulk of Medicare’s 

spending is on a fee-for-service basis, whereas most private health care spending occurs 

through plans that manage care to some degree. Such plans limit the use of services that 

have marginal or no benefit to patients (some of which might otherwise be provided as 

“defensive” medicine); in that way, plans control costs and keep premiums lower than 

they otherwise would be. In research reported in 2002, Kessler and McClellan found that 

when tort reform was introduced, health care spending in regions with relatively more 

enrollees in managed care plans did not fall as much as it did in regions with relatively 

fewer enrollees. Presumably, the managed care plans had already eliminated some of the 

defensive medicine that would otherwise have been diminished by tort reform. 

 

2

 Spending in some discretionary federal programs could also be reduced, but funding for those programs is 

subject to future appropriation action and is not included in the estimates in Table 1. For example, some 

savings could be realized if the amounts appropriated to such federal agencies as the Department of 

Defense and the Department of Veterans Affairs were reduced because of lower health care costs as a result 

of tort reform. In CBO’s estimation, that reduction would be less than $1 billion during the 2010–2019 

period. The impact on federal agencies would be proportionally smaller than the impact on the overall 

health care system because medical malpractice costs are already lower than average for entities covered by 

the Federal Tort Claims Act. 
Honorable Orrin G. Hatch 

Page 5 

By reducing spending on health care in the private sector, the package of proposals 

discussed here would also affect federal revenues. Much private-sector health care is 

provided through employment-based insurance that represents nontaxable compensation. 

Lower costs for health care arising from those proposals would lead to higher taxable 

wages and thereby increase federal tax revenues by an estimated $13 billion over the next 

10 years, according to estimates by the staff of the Joint Committee on Taxation (JCT). 

Combining the effects on both mandatory spending and revenues, a tort reform package 

of the sort described earlier in this letter would reduce federal budget deficits by roughly 

$54 billion over the next 10 years. That estimate assumes that a change enacted in 2010 

would have an impact that increased over time, achieving its full effect after four years, 

as providers gradually changed their practice patterns. Of course, the estimated effect of 

any specific legislative proposal would depend on the details of that proposal. 

The Effects of Tort Reform on Health Outcomes 

Because medical malpractice laws exist to allow patients to sue for damages that result 

from negligent health care, imposing limits on that right might be expected to have a 

negative impact on health outcomes. There is less evidence about the effects of tort 

reform on people’s health, however, than about its effects on health care spending—

because many studies of malpractice costs do not examine health outcomes. Some recent 

research has found that tort reform may adversely affect such outcomes, but other studies 

have concluded otherwise. Lakdawalla and Seabury (2009) found that a 10 percent 

reduction in costs related to medical malpractice liability would increase the nation’s 

overall mortality rate by 0.2 percent. However, Kessler and McClellan (1996 and 2002) 

and Sloan and Shadle (2009) concluded that tort reform generated no significant adverse 

outcomes for patients’ health. 

I hope you find this information useful. If you have any further questions, please contact 

me or my staff. The primary staff contact is Stuart Hagen. 

Sincerely, 

Douglas W. Elmendorf 

Director 

cc: Honorable Patrick J. Leahy 

 Chairman 

 Senate Committee on the Judiciary 

 Honorable Jeff Sessions 

 Ranking Member 

 Senate Committee on the Judiciary 

 Honorable John Conyers Jr. 

 Chairman 

 House Committee on the Judiciary 
Honorable Orrin G. Hatch 

Page 6 

 

Honorable Lamar Smith 

 Ranking Member 

 House Committee on the Judiciary 

Attachment: References 
Honorable Orrin G. Hatch 

Page 7 

References 

Avraham, Ronen, Leemore S. Dafny, and Max M. Schanzenbach. 2009. The Impact of 

Tort Reform on Employer-Sponsored Health Insurance Premiums. Working Paper 

w15371. Cambridge, Mass.: National Bureau of Economic Research. September. 

Baicker, Katherine, Elliot S. Fisher, and Amitabh Chandra. 2007. “Malpractice Liability 

Costs and the Practice of Medicine in the Medicare Program.” Health Affairs, vol. 26, 

no. 3, pp. 841–852. 

CBO (Congressional Budget Office). 2006. Medical Malpractice Tort Limits and Health 

Care Spending. CBO Background Paper. April. 

CBO (Congressional Budget Office). 2008. Key Issues in Analyzing Major Health 

Insurance Proposals. December. 

Currie, Janet, and W. Bentley MacLeod. 2008. “First Do No Harm? Tort Reform and 

Birth Outcomes.” Quarterly Journal of Economics, vol. 123, no. 2, pp. 795–830. 

Kessler, Daniel, and Mark McClellan. 1996. “Do Doctors Practice Defensive Medicine?” 

Quarterly Journal of Economics, vol. 111, no. 2, pp. 354–380. 

Kessler, Daniel, and Mark McClellan. 2002. “Malpractice Law and Health Care Reform: 

Optimal Liability Policy in an Era of Managed Care.” Journal of Public Economics, 

vol. 84, no.2, pp. 175–195. 

Lakdawalla, Darius N., and Seth A. Seabury. 2009. The Welfare Effects of Medical 

Malpractice Liability. Working Paper w15383. Cambridge, Mass.: National Bureau of 

Economic Research. September. 

Sloan, Frank A., and John H. Shadle. 2009. “Is There Empirical Evidence for ‘Defensive 

Medicine’? A Reassessment.” Journal of Health Economics, vol. 28, no. 2, pp. 481–491. 

 
www.cbo.gov 

CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director 

U.S. Congress 

Washington, DC 20515 

December 10, 2009 

Honorable John D. Rockefeller IV 

United States Senate 

Washington, DC 20510 

Dear Senator: 

This letter responds to questions you posed about the Congressional Budget 

Office’s (CBO’s) recent analysis of the budgetary effects of proposals to limit 

costs related to medical malpractice (“tort reform”), as described in a letter to 

Senator Hatch.1 In particular, this letter addresses your questions about how 

recent empirical studies affected CBO’s analysis, why CBO’s latest estimates of 

the budgetary effects of tort reform are larger than the agency’s previous 

estimates, and whether tort reform would have a negative impact on patients’ 

health. 

In the letter to Senator Hatch, CBO concluded that tort reform would lower costs 

for health care both directly, by reducing medical malpractice costs, and 

indirectly, by reducing the use of health care services through changes in the 

practice patterns of providers; the agency estimated that enacting a package of 

proposals outlined in that letter would reduce federal budget deficits by about 

$54 billion during the 2010–2019 period. Previously, the agency had found that 

tort reform would lower health care costs only by reducing medical malpractice 

costs, and it had estimated significantly smaller effects of tort reform on the 

federal budget. In the letter to Senator Hatch, CBO noted that imposing limits on 

suits for damages resulting from negligent health care might have a negative 

impact on health outcomes but concluded that the evidence is less clear about the 

effects of tort reform on health outcomes than it is about the effects on health care 

costs. 

Recent Research Findings 

CBO’s latest assessment of the effects of tort reform on spending for health care 

draws on a considerable amount of analysis that the agency has undertaken during 

the past several years and a stream of recent research studies that have used a 

 

1

 Congressional Budget Office, letter to the Honorable Orrin G. Hatch regarding effects of 

proposals to limit costs related to medical malpractice (October 9, 2009). 
Honorable John D. Rockefeller IV 

Page 2 

variety of data and empirical techniques.2 Despite that analysis, estimates of the 

budgetary effects of tort reform are unavoidably uncertain, as is true for many 

other issues that CBO studies. In dealing with uncertainty, the agency consistently 

strives to produce estimates that lie in the middle of the distribution of plausible 

outcomes based upon available knowledge. 

After a careful evaluation of the research relevant to tort reform, along with 

discussions with members of the agency’s Panel of Health Advisers who have 

particular expertise in this topic, CBO concluded that the weight of empirical 

evidence now demonstrates a link between tort reform and the use of health care 

services. The estimates from CBO’s own empirical analysis in 2006 implied that 

implementing the package of tort reforms described in the recent letter to Senator 

Hatch would reduce the use of health care services and, thereby, health care 

spending—a finding that was consistent with the results of some studies done by 

outside researchers.3

 However, the studies available at that time (including 

CBO’s) reported estimates that varied considerably in magnitude and contained 

some anomalous results, so CBO concluded that there was not sufficient evidence 

to incorporate in its budget estimates an effect of tort reform on health care 

utilization. More-recent studies have provided further support for the hypothesis 

that tort reform would slightly reduce the use of health care, and they have helped 

to resolve some apparent anomalies in earlier findings.4

 

For example, studies by Lakdawalla and Seabury and by Avraham, Dafny, and 

Schanzenbach analyzed data that had not been used in previous research and used 

statistical methods that strengthened the evidence regarding the effects of tort 

reform on health care utilization and spending. Previous research had generally 

compared changes in health care spending over time in states that had and had not 

adopted tort reforms, controlling for other observable differences among states. 

Lakdawalla and Seabury used an approach that did not rely on comparisons of 

state tort reforms; they found that a reduction in medical malpractice costs was 

 

2

 For CBO’s earlier analyses, see The Effects of Tort Reform: Evidence from the States (June 

2004) and Medical Malpractice Tort Limits and Health Care Spending (April 2006). 

3

 See Daniel Kessler and Mark McClellan, “Do Doctors Practice Defensive Medicine?” Quarterly 

Journal of Economics, vol. 111, no. 2 (1996), pp. 354–380; and Daniel Kessler and Mark 

McClellan, “Malpractice Law and Health Care Reform: Optimal Liability Policy in an Era of 

Managed Care,” Journal of Public Economics, vol. 84, no. 2 (2002), pp.175–195. 

4

 See Ronen Avraham, Leemore S. Dafny, and Max M. Schanzenbach, The Impact of Tort Reform 

on Employer-Sponsored Health Insurance Premiums, Working Paper No. w15371 (Cambridge, 

Mass.: National Bureau of Economic Research, September 2009); Katherine Baicker, Elliot S. 

Fisher, and Amitabh Chandra, “Malpractice Liability Costs and the Practice of Medicine in the 

Medicare Program,” Health Affairs, vol. 26, no. 3 (2007), pp. 841–852; Janet Currie and W. 

Bentley MacLeod, “First Do No Harm? Tort Reform and Birth Outcomes,” Quarterly Journal of 

Economics, vol. 123, no. 2 (2008), pp. 795–830; Darius N. Lakdawalla and Seth A. Seabury, The 

Welfare Effects of Medical Malpractice Liability, Working Paper No. w15383 (Cambridge, Mass.: 

National Bureau of Economic Research, September 2009); and Frank A. Sloan and John H. 

Shadle, “Is There Empirical Evidence for “Defensive Medicine”? A Reassessment,” Journal of 

Health Economics, vol. 28, no. 2 (2009), pp. 481–491. 
Honorable John D. Rockefeller IV 

Page 3 

associated with a reduction in health care spending that exceeded what would 

arise solely from the direct effect of that reduction in malpractice costs. Avraham, 

Dafny, and Schanzenbach analyzed the impact of tort reform on health insurance 

premiums; they found that tort reform was associated with a reduction in 

premiums for self-insured plans that, again, exceeded what would arise from the 

direct effect of tort reform on malpractice costs. 

In addition, a study by Baicker, Fisher, and Chandra found that use of diagnostic 

services, especially imaging, showed the largest changes in response to a change 

in malpractice costs. That result is consistent with a common view that ordering 

additional diagnostic services is a preferred strategy for reducing exposure to 

medical malpractice liability. That study reinforced the findings from other 

studies that tort reform would affect health care utilization by changing the 

practice patterns of providers. A study by Sloan and Shadle found mixed evidence 

of an effect of tort reform on health care spending. The authors estimated that 

certain types of tort reform had no effect on total spending by hospitals, while 

other types decreased it. 

Previous research by CBO and others had found that replacing “joint and several” 

liability laws with a “fair share” rule appeared to increase health care spending—

in contrast with other tort reforms, such as caps on noneconomic damages, which 

appeared to decrease spending. A study by Currie and MacLeod explained that a 

fair share rule is unusual among commonly discussed tort reforms because it 

increases the risk of financial liability perceived by most physicians. In CBO’s 

view, if physicians generally react to greater liability pressure by performing more 

procedures, then a fair share rule would be expected to increase overall health 

care utilization and spending.5

 That explanation helped to make sense of 

previously counterintuitive results and therefore gave CBO greater confidence in 

those earlier results. 

CBO’s Updated Estimates of the Budgetary Effects of Tort Reform 

In CBO’s December 2008 Budget Options volume, a common package of tort 

reform proposals was estimated to decrease spending by about $4 billion and to 

increase revenues by about $1 billion from 2010 to 2019.6

 In CBO’s letter to 

Senator Hatch, those proposals were estimated to decrease spending by roughly 

$41 billion and increase revenues by roughly $13 billion over that same period. 

The latest estimates are substantially larger than the earlier ones for four principal 

reasons: 

 

5

 Seemingly contrary to that logic, Currie and MacLeod estimated that adopting a fair share rule 

decreased utilization. However, their analysis focused on a single procedure, births by Caesarean 

section. 

6

 See Congressional Budget Office, Budget Options, Volume 1: Health Care (December 2008), 

pp. 21–22. 
Honorable John D. Rockefeller IV 

Page 4 

• They include a larger estimate of the effect of tort reform on medical 

malpractice costs; 

• They incorporate the effect of a gradual reduction in the utilization of 

health care services resulting from changes in the practice patterns of 

providers; 

• The estimated effect on federal revenues was substantially smaller in the 

previous estimate (which reflected only a reduction in malpractice costs) 

than the estimated effect on revenues in the current estimate (which 

reflects the combined effects of the reduction in malpractice costs and the 

change in spending attributable to changes in practice patterns); and 

 

• The reduction in utilization is projected to generate a proportionately 

larger reduction in federal spending on health care than in other spending 

on health care. 

Tort Reform Would Have a Greater Effect on Malpractice Costs. CBO 

periodically updates its estimates of the effect of tort reform on malpractice costs 

as new data on malpractice costs and state laws become available and the agency 

improves its techniques for modeling the effects of tort reform. CBO currently 

estimates that the nation’s direct costs for medical malpractice—which consist of 

malpractice insurance premiums and settlements, awards, and administrative costs 

not covered by insurance—would be reduced by about 10 percent (relative to the 

amounts under current law) if the common package of tort reforms was 

implemented nationwide. CBO’s previous estimate was that tort reform would 

lower malpractice costs nationwide by about 6 percent.7

Tort Reform Would Also Affect the Utilization of Health Care Services. As 

described in CBO’s letter to Senator Hatch and reiterated above, the agency’s 

estimates of the effects of tort reform now incorporate a slight reduction in the 

utilization of health care attributable to changes in the practice patterns of 

providers. The combination of direct savings in malpractice costs and indirect 

savings in health care services would reduce national health spending in response 

to the proposed reforms by roughly 0.5 percent, CBO projects. The increase in 

CBO’s estimate of the effects of tort reform on health care spending—arising 

from both the larger estimated change in malpractice costs and the incorporation 

of the change in utilization owing to changes in practice patterns—implies a 

significant increase in the estimated effects of tort reform on both federal tax 

revenues and federal outlays. 

The Effect of Reduced Health Care Spending on Revenues Would Be 

Greater. On the revenue side, a reduction in spending on health care arising from 

 

7

 See Congressional Budget Office, Key Issues in Analyzing Major Health Insurance Proposals,

pp. 150–154. 
Honorable John D. Rockefeller IV 

Page 5 

tort reform would shift some compensation from employment-based health 

insurance (which is excluded from income and payroll taxes) to taxable wages 

and salaries, thereby increasing tax revenues. That reduction in spending on 

health care—and the resulting revenue impact—would be the combined effect of 

three consequences of tort reform: a reduction in malpractice costs; a reduction in 

the use of health care services; and an increase in the amount of health insurance 

purchased because of lower insurance prices brought about by the two other 

factors. In CBO’s previous estimate, the second factor on that list was not 

included, and the induced increase in insurance purchases offset a considerable 

share of the decrease in spending due to lower malpractice costs; as a result, the 

net reduction in spending was a good deal smaller than the 0.2 percent figure that 

represents CBO’s current assessment of the effect of tort reform on health care 

spending due to the reduction in malpractice costs. In CBO’s latest estimate, the 

reduction in spending owing to changes in providers’ practice patterns 

significantly outweighs the induced increase in insurance purchases; as a result, 

the net reduction in spending incorporating all three factors listed above is 0.5 

percent. Thus, the estimated increase in federal tax revenues from tort reform has 

risen by more than the ratio of 0.5 to 0.2. 

Changes in Utilization Would Have a Proportionately Greater Effect on 

Federal Spending. On the outlay side, the reduction in the utilization of health 

care services due to changes in practice patterns would have a proportionately 

larger effect on federal spending for health care than it would have on other 

spending for health care. The most important reason for the difference is that, 

according to empirical evidence, utilization of care in Medicare would be reduced 

more than would utilization of care as a whole. The greater impact in Medicare 

can probably be explained by two factors. First, the bulk of Medicare services are 

provided on a fee-for-service basis, whereas most private health care spending 

occurs through plans that manage the utilization of care to some degree. Such 

plans may limit the use of services that have marginal benefit to patients to a 

greater degree than does Medicare, leaving less room for changes in pressures 

regarding malpractice to affect utilization. Second, when compared with the use 

of private health care services, the use of services in Medicare is less likely to be 

influenced by the effects of changes in malpractice costs on the premiums and 

cost sharing faced by patients. 

Effects of Tort Reform on Patients’ Health 

As you noted in your letter, the potential impact of tort reform on the quality of 

health care and on health outcomes is an important consideration for 

policymakers. CBO’s letter to Senator Hatch observed that imposing limits on 

patients’ suits involving harm from negligent health care might be expected to 

have a negative effect on health outcomes. The letter also noted that there is less 

evidence about the effects of tort reform on people’s health than there is about its 

effects on health care spending, because many studies of malpractice costs have 

not examined health outcomes. 
Honorable John D. Rockefeller IV 

Page 6 

Among the analyses that have investigated health outcomes, the study by 

Lakdawalla and Seabury cited earlier reported that lower malpractice costs were 

associated with an increase in mortality, while the study by Currie and MacLeod 

found positive impacts on health from reform of joint and several liability and 

negative impacts from caps on noneconomic damages. Studies by Kessler and 

McClellan (1996 and 2002) and Sloan and Shadle (2009) found that state tort 

reforms had no significant effects on health. Thus, the limited evidence currently 

available about the effects of tort reform on health outcomes is much more mixed 

than the larger collection of evidence currently available about the effects of tort 

reform on health care spending. 

Those mixed results related to health outcomes may arise, in part, because of the 

complicated relationship between malpractice claims and medical errors. As CBO 

discussed in its December 2008 Key Issues in Analyzing Major Health Insurance 

Proposals, an estimated 181,000 severe medical injuries attributable to negligence 

occurred in U.S. hospitals in 2003.8

 However, the correlation between errors and 

malpractice claims is weaker than might be supposed. An analysis using data 

from the state of New York, called the Harvard Medical Practice Study, showed 

that a majority of hospital patients who suffered injuries because of negligence 

never filed claims and that a substantial fraction of claims that were filed involved 

health problems that did not appear to be caused by negligence (as judged by a 

panel of medical professionals)—although patients who suffered injuries due to 

negligence were more likely to file claims and to receive higher compensation 

than patients who did not suffer injuries due to negligence.9

Your letter raised the concern that, if tort reform led to worse health outcomes, 

future health care spending could be higher. CBO’s estimates of the likely effects 

of tort reform are based on research that links changes in malpractice costs to 

changes in health care spending, including not only the spending changes caused 

by providers’ responses to changes in the medical liability environment but also 

the spending changes resulting from associated changes in health status. With all 

of those factors taken into account, the weight of evidence indicates that tort 

reform would reduce the utilization of health care services and, thereby, spending. 

Nevertheless, spending might increase for certain patients, providers, or 

procedures, while decreasing for others.10 In addition, currently available research 

 

8

 See Congressional Budget Office, Key Issues, pp. 150–154. 

9

 See Paul C. Weiler and others, A Measure of Malpractice: Medical Injury, Malpractice 

Litigation and Patient Compensation (Cambridge, Mass.: Harvard University Press, 1993). 

Similar patterns of results have been documented in subsequent studies, including David M. 

Studdert and others, “Negligent Care and Malpractice Claiming Behavior in Utah and Colorado,” 

Medical Care, vol. 38, no. 3 (2000), pp. 250–260; and David M. Studdert and others, “Claims, 

Errors, and Compensation Payments in Medical Malpractice Litigation,” New England Journal of 

Medicine, vol. 354, no. 19 (2006), pp. 2024–2033. 

10 For example, Currie and MacLeod found that the rates at which Caesarean-section deliveries 

were performed increased when caps on noneconomic damages were implemented. 
Honorable John D. Rockefeller IV 

Page 7 

might not capture the effects that changes in health outcomes due to tort reform 

could have on health care spending over the long run; hopefully, future research 

can fill that gap. 

I hope you find this information useful. If you have any further questions, please 

contact me or my staff. The primary staff contact is Stuart Hagen. 

 Sincerely, 

 

 Douglas W. Elmendorf 

 Director 

cc: Honorable Orrin G. Hatch 

Honorable Patrick J. Leahy 

 Chairman 

 Senate Committee on the Judiciary 

 Honorable Jeff Sessions 

 Ranking Member 

 Senate Committee on the Judiciary 

 Honorable John Conyers, Jr. 

 Chairman 

 House Committee on the Judiciary 

 Honorable Lamar Smith 

 Ranking Member 

 House Committee on the Judiciary 
www.cbo.gov 

CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director 

U.S. Congress 

Washington, DC 20515 

December 29, 2009 

Honorable Bruce L. Braley 

U.S. House of Representatives 

Washington, DC 20515 

Dear Congressman: 

This letter responds to questions you posed about the Congressional Budget 

Office’s (CBO’s) recent analysis of the budgetary effects of proposals to limit 

costs related to medical malpractice (“tort reform”), as described in a letter to 

Senator Hatch.1 In particular, this letter addresses your questions about factors 

that affect premiums for medical malpractice insurance, the effects of tort reform 

on patients’ health, how recent empirical studies affected CBO’s analysis, and 

why CBO’s latest estimates of the budgetary effects of tort reform are larger than 

the agency’s previous estimates. 

In its letter to Senator Hatch, CBO concluded that tort reform would lower costs 

for health care both directly, by reducing medical malpractice costs—which 

consist of malpractice insurance premiums and settlements, awards, and legal and 

administrative costs not covered by insurance—and indirectly, by reducing the 

use of health care services through changes in the practice patterns of providers. 

The agency estimated that enacting a package of proposals outlined in that letter 

would reduce federal budget deficits by about $54 billion during the 2010–2019 

period. Previously, the agency had found that tort reform would lower health care 

costs only by reducing medical malpractice costs, and it had estimated 

significantly smaller effects of tort reform on the federal budget. In the letter to 

Senator Hatch, CBO noted that imposing limits on suits for damages resulting 

from negligent health care might have a negative impact on health outcomes but 

concluded that the evidence is less clear about the effects of tort reform on health 

outcomes than it is about the effects on health care costs. 

Tort Reform and Malpractice Premiums 

When setting premiums for malpractice policies, insurers are likely to take into 

account a number of factors, including: recent payments for awards and 

settlements; the anticipated cost of future payments and the amount of uncertainty 

surrounding them (taking into account the legal environment in which the insurer 

 

1

 Congressional Budget Office, letter to the Honorable Orrin G. Hatch regarding effects of 

proposals to limit costs related to medical malpractice (October 9, 2009). 
Honorable Bruce L. Braley 

Page 2 

operates); the extent of competition in the malpractice insurance market; the 

expected rate of return on invested premium income; and administrative 

expenses.

2

 Because it often takes several years for a malpractice claim to be 

settled, a substantial period of time may elapse before insurers find out whether 

they correctly predicted future payments when setting the premium. If actual 

payments turn out to be greater than predicted, insurers may increase premiums to 

cover the shortfall; if actual payments are less than predicted, insurers may 

decrease premiums to remain competitive in the industry. That characteristic of 

the market for medical malpractice insurance, along with changes in interest rates, 

contributes to cyclical increases and decreases in premiums from year to year. 

The study by Rodwin, Chang, Ozaeta, and Omar that you cited in your letter 

noted that outcome, and pointed out that although medical malpractice premiums 

may vary substantially in the short run, over the long run premiums reflect 

liability costs.3

 

Reflecting that relationship, a number of recent research studies, as well as CBO’s 

own analyses, have found that tort reform lowers medical malpractice premiums.4

Studies by Thorpe and by Kilgore, Morrissey, and Nelson found that caps on 

noneconomic damages substantially reduced premiums, while a study by Danzon, 

Epstein, and Johnson found that both caps on noneconomic damages and changes 

to “joint and several liability” laws lowered premiums.5

 A study by Born, Viscusi, 

and Baker showed that tort reforms significantly lowered payments by insurers 

for awards and settlements and also lowered the gap between actual payments and 

those predicted by the insurer at the start of the claims process.6 Both of those 

effects—lower overall payments and more certainty about future payments—are 

consistent with reductions in medical malpractice premiums associated with tort 

reform. 

 

2

 For a review of the literature, see Faith R. Neale and others, “Dynamics of the Market for 

Medical Malpractice Insurance,” Journal of Risk and Insurance, vol. 76, no. 1 (2009), pp. 221–

247. 

3

 See Marc A. Rodwin, Hak J. Chang, Melissa M. Ozaeta, and Richard J. Omar, “Malpractice 

Premiums in Massachusetts, A High-Risk State: 1975 to 2005,” Health Affairs, vol. 27, no. 1 

(2008), pp. 835–844. 

4

 See Congressional Budget Office, Medical Malpractice Tort Limits and Health Care Spending 

(April 2006). 

5

 See Kenneth E. Thorpe, “The Medical Malpractice ‘Crisis’: Recent Trends and the Impact of 

State Tort Reforms,” Health Affairs, vol. W4, pp. 20-30; Merideth Kilgore, Michael A. Morrisey, 

and Leonard J. Nelson, “Tort Law and Medical Malpractice Insurance Premiums,” Inquiry, vol. 

43, no. 3 (2006), pp. 255–270; and Patricia M. Danzon, Andrew J. Epstein, and Scott J. Johnson, 

“The Crisis in Medical Malpractice Insurance,” in Robert E. Litan and Richard Herring, eds., 

Brookings-Wharton Papers on Financial Services (Washington, D.C.: Brookings Institution 

Press), pp. 55–95. 

6

See Patricia Born, W. Kip Viscusi, and Tom Baker, “The Effects of Tort Reform on Medical 

Malpractice Insurers’ Ultimate Losses,” Journal of Risk and Insurance, vol. 76, no. 1 (2009), pp. 

197–219. 
Honorable Bruce L. Braley 

Page 3 

Analyses like those cited above are the best ones for identifying the effects of tort 

reform on malpractice insurance premiums because they use data for many states 

and control for the relevant characteristics of states’ health care markets that may 

affect malpractice premiums. Studies that simply observe changes in premiums 

over time in states that do, and do not, adopt reforms are less suited to isolating 

the actual effects of tort reform. One reason is that the markets for medical 

malpractice insurance, physicans’ services, and health care more broadly are 

likely to be different in states that choose to adopt tort reforms and states that do 

not. Additionally, states may experience other changes in their health care system 

at the same time tort reforms are implemented. Those analytical challenges are 

dealt with in the studies on which CBO has based its estimates. 

The Effects of Tort Reform on Patients’ Health 

As you noted in your letter, the potential impact of tort reform on the quality of 

health care and on health outcomes is an important consideration for 

policymakers. CBO’s letter to Senator Hatch observed that imposing limits on 

patients’ suits involving harm from negligent health care might be expected to 

have a negative effect on health outcomes. The letter also noted that there is less 

evidence about the effects of tort reform on people’s health than there is about its 

effects on health care spending, because many studies of malpractice costs have 

not examined health outcomes. 

Among the analyses that have investigated health outcomes, a recent study by 

Lakdawalla and Seabury reported that lower malpractice costs were associated 

with an increase in mortality, while a study by Currie and MacLeod found 

positive impacts on health from reform of joint and several liability and negative 

impacts from caps on noneconomic damages.7

 Studies by Kessler and McClellan 

and by Sloan and Shadle found that state tort reforms had no significant effects on 

health.8 Similarly, a study by Baicker, Fisher, and Chandra found that there was 

no significant association between mortality and malpractice costs.9 Thus, the 

limited evidence currently available about the effects of tort reform on health 

outcomes is much more mixed than the larger collection of evidence currently 

available about the effects of tort reform on health care spending. 

 

7

 See Darius N. Lakdawalla and Seth A. Seabury, The Welfare Effects of Medical Malpractice 

Liability, Working Paper No. w15383 (Cambridge, Mass.: National Bureau of Economic 

Research, September 2009); and Janet Currie and W. Bentley MacLeod, “First Do No Harm? Tort 

Reform and Birth Outcomes,” Quarterly Journal of Economics, vol. 123, no. 2 (2008), pp. 795–

830. 

8

 See Daniel Kessler and Mark McClellan, “Do Doctors Practice Defensive Medicine?” Quarterly 

Journal of Economics, vol. 111, no. 2 (1996), pp. 354–380; Daniel Kessler and Mark McClellan, 

“Malpractice Law and Health Care Reform: Optimal Liability Policy in an Era of Managed Care,” 

Journal of Public Economics, vol. 84, no. 2 (2002), pp.175–195; and Frank A. Sloan and John H. 

Shadle, “Is There Empirical Evidence for “Defensive Medicine”? A Reassessment,” Journal of 

Health Economics, vol. 28, no. 2 (2009), pp. 481–491. 

9

 See Katherine Baicker, Elliot S. Fisher, and Amitabh Chandra, “Malpractice Liability Costs and 

the Practice of Medicine in the Medicare Program,” Health Affairs, vol. 26, no. 3 (2007), pp. 841–

852. 
Honorable Bruce L. Braley 

Page 4 

Those mixed results related to health outcomes may arise, in part, because of the 

complicated relationship between malpractice claims and medical errors. As CBO 

discussed in its December 2008 report Key Issues in Analyzing Major Health 

Insurance Proposals, an estimated 181,000 severe medical injuries attributable to 

negligence occurred in U.S. hospitals in 2003.10 However, the correlation between 

errors and malpractice claims is weaker than might be supposed. An analysis 

using data from the state of New York, called the Harvard Medical Practice 

Study, showed that a majority of hospital patients who suffered injuries because 

of negligence never filed claims and that a substantial fraction of claims that were 

filed involved health problems that did not appear to be caused by negligence (as 

judged by a panel of medical professionals)—although patients who suffered 

injuries due to negligence were more likely to file claims and to receive higher 

compensation than patients who did not suffer injuries due to negligence.11

Recent Research on Tort Reform and Health Care Spending 

CBO’s latest assessment of the effects of tort reform on spending for health care 

draws on a considerable amount of analysis that the agency has undertaken during 

the past several years and a stream of recent research studies that have used a 

variety of data and empirical techniques.12 Despite that analysis, estimates of the 

budgetary effects of tort reform are unavoidably uncertain, as is true for many 

other issues that CBO studies. In dealing with uncertainty, the agency consistently 

strives to produce estimates that lie in the middle of the distribution of plausible 

outcomes based upon available knowledge. 

After a careful evaluation of the research relevant to tort reform, along with 

discussions with members of the agency’s Panel of Health Advisers who have 

particular expertise in this topic, CBO concluded that the weight of empirical 

evidence now demonstrates a link between tort reform and the use of health care 

services. The estimates from CBO’s own empirical analysis in 2006 implied that 

implementing the package of tort reforms described in the recent letter to Senator 

Hatch would reduce the use of health care services and, thereby, health care 

spending—a finding that was consistent with the results of some studies done by 

outside researchers.13 However, the studies available at that time (including 

 

10 See Congressional Budget Office, Key Issues, pp. 150–154. 

11 See Paul C. Weiler and others, A Measure of Malpractice: Medical Injury, Malpractice 

Litigation and Patient Compensation (Cambridge, Mass.: Harvard University Press, 1993). 

Similar patterns of results have been documented in subsequent studies, including David M. 

Studdert and others, “Negligent Care and Malpractice Claiming Behavior in Utah and Colorado,” 

Medical Care, vol. 38, no. 3 (2000), pp. 250–260; and David M. Studdert and others, “Claims, 

Errors, and Compensation Payments in Medical Malpractice Litigation,” New England Journal of 

Medicine, vol. 354, no. 19 (2006), pp. 2024–2033. 

12 For CBO’s earlier analyses, see The Effects of Tort Reform: Evidence from the States (June 

2004) and Medical Malpractice Tort Limits and Health Care Spending (April 2006). 

13 See Kessler and McClellan, “Do Doctors Practice Defensive Medicine?” and “Malpractice Law 

and Health Care Reform.” 
Honorable Bruce L. Braley 

Page 5 

CBO’s) reported estimates that varied considerably in magnitude and contained 

some anomalous results, so CBO concluded that there was not sufficient evidence 

to incorporate in its budget estimates an effect of tort reform on health care 

utilization. More-recent studies have provided further support for the hypothesis 

that tort reform would slightly reduce the use of health care, and they have helped 

to resolve some apparent anomalies in earlier findings.14 

For example, the study by Lakdawalla and Seabury and one by Avraham, Dafny, 

and Schanzenbach analyzed data that had not been used in previous research and 

used statistical methods that strengthened the evidence regarding the effects of 

tort reform on health care utilization and spending. Previous research had 

generally compared changes in health care spending over time in states that had 

and had not adopted tort reforms, controlling for other observable differences 

among states. Lakdawalla and Seabury used an approach that did not rely on 

comparisons of state tort reforms; they found that a reduction in medical 

malpractice costs was associated with a reduction in health care spending that 

exceeded what would arise solely from the direct effect of that reduction in 

malpractice costs. Avraham, Dafny, and Schanzenbach analyzed the impact of 

tort reform on health insurance premiums; they found that tort reform was 

associated with a reduction in premiums for self-insured plans that, again, 

exceeded what would arise from the direct effect of tort reform on malpractice 

costs. 

In addition, the study by Baicker, Fisher, and Chandra found that use of 

diagnostic services, especially imaging, showed the largest changes in response to 

a change in malpractice costs. That result is consistent with a common view that 

ordering additional diagnostic services is a preferred strategy for reducing 

exposure to medical malpractice liability. That study reinforced the findings from 

other studies that tort reform would affect health care utilization by changing the 

practice patterns of providers. The study by Sloan and Shadle found mixed 

evidence of an effect of tort reform on health care spending. The authors 

estimated that certain types of tort reform had no effect on total spending by 

hospitals, while other types decreased it. 

Previous research by CBO and others had found that replacing joint and several 

liability laws with a “fair share” rule appeared to increase health care spending—

in contrast with other tort reforms, such as caps on noneconomic damages, which 

appeared to decrease spending. The study by Currie and MacLeod explained that 

a fair share rule is unusual among commonly discussed tort reforms because it 

increases the risk of financial liability perceived by most physicians. In CBO’s 

 

14 See Ronen Avraham, Leemore S. Dafny, and Max M. Schanzenbach, The Impact of Tort 

Reform on Employer-Sponsored Health Insurance Premiums, Working Paper No. w15371 

(Cambridge, Mass.: National Bureau of Economic Research, September 2009); Baicker, Fisher, 

and Chandra (2007); Currie and MacLeod (2008); Lakdawalla and Seabury (2009); and Sloan and 

Shadle (2009). 
Honorable Bruce L. Braley 

Page 6 

view, if physicians generally react to greater liability pressure by performing more 

procedures, then a fair share rule would be expected to increase overall health 

care utilization and spending.15 That explanation helped to make sense of 

previously counterintuitive results and therefore gave CBO greater confidence in 

those earlier results. 

CBO’s Updated Estimates of the Budgetary Effects of Tort Reform 

In CBO’s December 2008 Budget Options volume, a common package of tort 

reform proposals was estimated to decrease spending by about $4 billion and to 

increase revenues by about $1 billion from 2010 to 2019.16 In CBO’s letter to 

Senator Hatch, those proposals were estimated to decrease spending by roughly 

$41 billion and increase revenues by roughly $13 billion over that same period. 

The latest estimates are substantially larger than the earlier ones for four principal 

reasons: 

• They include a larger estimate of the effect of tort reform on medical 

malpractice costs; 

• They incorporate the effect of a gradual reduction in the utilization of 

health care services resulting from changes in the practice patterns of 

providers; 

• The estimated effect on federal revenues was substantially smaller in the 

previous estimate (which reflected only a reduction in malpractice costs) 

than the estimated effect on revenues in the current estimate (which 

reflects the combined effects of the reduction in malpractice costs and the 

change in spending attributable to changes in practice patterns); and 

 

• The reduction in utilization is projected to generate a proportionately 

larger reduction in federal spending on health care than in other spending 

on health care. 

Tort Reform Would Have a Greater Effect on Malpractice Costs. CBO 

periodically updates its estimates of the effect of tort reform on malpractice costs 

as new data on malpractice costs and state laws become available and the agency 

improves its techniques for modeling the effects of tort reform. CBO currently 

estimates that the nation’s direct costs for medical malpractice—which consist of 

malpractice insurance premiums and settlements, awards, and legal and 

administrative costs not covered by insurance—would be reduced by about 

10 percent (relative to the amounts under current law) if the common package of 

 

15 Seemingly contrary to that logic, Currie and MacLeod estimated that adopting a fair share rule 

decreased utilization. However, their analysis focused on a single procedure, births by Caesarean 

section. 

16 See Congressional Budget Office, Budget Options, Volume 1: Health Care (December 2008), 

pp. 21–22. 
Honorable Bruce L. Braley 

Page 7 

tort reforms was implemented nationwide. CBO’s previous estimate was that tort 

reform would lower malpractice costs nationwide by about 6 percent.17

Tort Reform Would Also Affect the Utilization of Health Care Services. As 

described in CBO’s letter to Senator Hatch and reiterated above, the agency’s 

estimates of the effects of tort reform now incorporate a slight reduction in the 

utilization of health care attributable to changes in the practice patterns of 

providers. The combination of direct savings in malpractice costs and indirect 

savings in health care services would reduce national health spending in response 

to the proposed reforms by roughly 0.5 percent, CBO projects. The increase in 

CBO’s estimate of the effects of tort reform on health care spending—arising 

from both the larger estimated change in malpractice costs and the incorporation 

of the change in utilization owing to changes in practice patterns—implies a 

significant increase in the estimated effects of tort reform on both federal tax 

revenues and federal outlays. 

The Effect of Reduced Health Care Spending on Revenues Would Be 

Greater. On the revenue side, a reduction in spending on health care arising from 

tort reform would shift some compensation from employment-based health 

insurance (which is excluded from income and payroll taxes) to taxable wages 

and salaries, thereby increasing tax revenues. That reduction in spending on 

health care—and the resulting revenue impact—would be the combined effect of 

three consequences of tort reform: a reduction in malpractice costs; a reduction in 

the use of health care services; and an increase in the amount of health insurance 

purchased because of lower insurance prices brought about by the two other 

factors. In CBO’s previous estimate, the second factor on that list was not 

included, and the induced increase in insurance purchases offset a considerable 

share of the decrease in spending attributable to lower malpractice costs; as a 

result, the estimated net reduction in spending was a good deal smaller than the 

0.2 percent figure that represents CBO’s current assessment of the effect of tort 

reform on health care spending because of the reduction in malpractice costs. In 

CBO’s latest estimate, the reduction in spending owing to changes in providers’ 

practice patterns significantly outweighs the induced increase in insurance 

purchases; as a result, the net reduction in health care spending incorporating all 

three factors listed above is 0.5 percent. Thus, the estimated increase in federal tax 

revenues from tort reform has risen by more than the ratio of 0.5 to 0.2. 

Changes in Utilization Would Have a Proportionately Greater Effect on 

Federal Spending. On the outlay side, the reduction in the utilization of health 

care services due to changes in practice patterns would have a proportionately 

larger effect on federal spending for health care than it would have on other 

spending for health care. The most important reason for the difference is that, 

according to empirical evidence, utilization of care in Medicare would be reduced 

 

17 See Congressional Budget Office, Key Issues in Analyzing Major Health Insurance Proposals,

pp. 150–154. 
Honorable Bruce L. Braley 

Page 8 

more than would utilization of care as a whole. The greater impact in Medicare 

can probably be explained by two factors. First, the bulk of Medicare services are 

provided on a fee-for-service basis, whereas most private health care spending 

occurs through plans that manage the utilization of care to some degree. Such 

plans may limit the use of services that have marginal benefit to patients to a 

greater degree than does Medicare, leaving less room for changes in pressures 

regarding malpractice to affect utilization. Second, when compared with the use 

of private health care services, the use of services in Medicare is less likely to be 

influenced by the effects of changes in malpractice costs on the premiums and 

cost sharing faced by patients. 

I hope you find this information useful. If you have any further questions, please 

contact me or my staff. The primary staff contact is Stuart Hagen. 

 Sincerely, 

 

 Douglas W. Elmendorf 

 Director 

cc: Honorable Orrin G. Hatch 

 Honorable John Conyers, Jr. 

 Chairman 

 House Committee on the Judiciary 

 Honorable Lamar Smith 

 Ranking Member 

 House Committee on the Judiciary 

Honorable Patrick J. Leahy 

 Chairman 

 Senate Committee on the Judiciary 

 Honorable Jeff Sessions 

 Ranking Member 

 Senate Committee on the Judiciary 
Other Issues

CBO analyzed a variety of other issues related to health care legislation—in some cases, analyzing the opportunities and challenges that are involved in designing large-scale proposals to 

change the health care and health insurance systems, and in other cases, addressing specific 

questions that arose during the Congressional debate. The publications included in this volume are the following: 

1. CBO testimony that was presented before the Senate Budget Committee on February 10, 

2009, about the issues that arise in trying to expand health insurance coverage and control 

costs for health care. 

2. A letter to Senate Budget Committee Chairman Kent Conrad and Ranking Member Judd 

Gregg on June 16, 2009, discussing the pressures that spending for health care are placing 

on the federal budget and the key issues that arise in trying to address those pressures. 

3. An issue brief discussing the effects that changes to the health insurance system might 

have on labor markets—including the effects of new penalties and subsidies for 

employment-based insurance as well as changes in the tax treatment of that coverage—

which was released on July 13, 2009. (CBO’s analysis of the likely impact of the enacted 

legislation on labor markets was included in its August 2010 report The Budget and Economic Outlook: An Update; see Box 2-1.) 

4. A letter to Representative Nathan Deal, dated August 7, 2009, discussing the effects of 

proposals to expand governmental support for preventive medical care and wellness programs and the challenges involved in reducing federal spending on health care as a result. 

5. A letter to Representative George Miller, Chairman of the House Education and Labor 

Committee, dated November 25, 2009, regarding the budgetary effects of proposals to 

establish a Community Living Assistance Services and Supports (CLASS) program; under 

that program, which was included in PPACA, the federal government will offer insurance 

for long-term care services that is designed to be financed by enrollees’ premiums. (An 

identical letter was sent to Senator Tom Harkin, Chairman of the Senate Health, Education, Labor, and Pensions Committee.) 

Congressional Budget Office

Testimony

CONGRESSIONAL BUDGET OFFICE

SECOND AND D STREETS, S.W.

WASHINGTON, D.C. 20515

Statement of 

Douglas W. Elmendorf 

Director

Expanding Health Insurance 

Coverage and Controlling 

Costs for Health Care

before the 

Committee on the Budget 

United States Senate

February 10, 2009

This document is embargoed until it is delivered at 

10:00 a.m. (EST) on Tuesday, February 10, 2009. The 

contents may not be published, transmitted, or otherwise 

communicated by any print, broadcast, or electronic 

media before that time.
Chairman Conrad, Senator Gregg, and Members of the Committee, thank you for 

inviting me to testify this morning about the opportunities and challenges that the 

Congress faces in pursuing two major policy goals: (1) expanding health insurance 

coverage, so that more Americans receive appropriate health care without undue 

financial burden, and (2) making the health care system more efficient, so that it can 

continue to improve Americans’ health but at a lower cost in both the public and private sectors. Both are complex endeavors in their own right, and interactions and 

trade-offs between them may arise. 

First, with respect to expanding health insurance coverage, my testimony makes the 

following key points: 

B Without changes in policy, a substantial and growing number of people under 

age 65 will lack health insurance. The Congressional Budget Office (CBO) estimates that the average number of nonelderly people who are uninsured will rise 

from at least 45 million in 2009 to about 54 million in 2019. That projection is 

consistent with long-standing trends in coverage and largely reflects the expectation 

that health care costs and health insurance premiums will continue to rise faster 

than people’s income—making health insurance more difficult to afford. 

B Proposals could achieve near-universal health insurance coverage by combining 

three key features: 

• Mechanisms for pooling risks—both to ensure that people who develop health 

problems can find affordable coverage and to keep people from waiting until 

they are sick to sign up for insurance. Options include strengthening the current 

employment-based system, modifying the market for individually purchased 

insurance, and establishing a new mechanism such as an insurance exchange.

• Subsidies to make health insurance less expensive for individuals and families, 

particularly those with lower income who are most likely to be uninsured today. 

For reasons of equity and administrative feasibility, however, it is difficult for 

subsidy systems to avoid “buying out the base”—that is, providing new subsidies to people who already have insurance or would have purchased it anyway. 

• Either an enforceable mandate for individuals to obtain insurance or an effective 

process to facilitate enrollment in a health plan. An enforceable mandate would 

generally have a greater effect on coverage rates, but without meaningful subsidies, it could impose a substantial burden on many people—given the cost of 

health insurance relative to the financial means of most uninsured individuals.
2

CBO

B Certain trade-offs arise in choosing how to design subsidies and mandates. To 

achieve near-universal coverage through subsidies alone would require that they 

cover a very large share of the premiums—which is an expensive proposition. But 

policymakers may also be reluctant to establish the penalties and enforcement 

mechanisms necessary to make a mandate effective. Other policies that adopted 

more limited versions of those three features could reduce the number of uninsured 

people to a lesser extent at a lower budgetary cost. 

Second, with respect to controlling costs and improving efficiency—so that we get the 

best health for the amount we spend as a nation—some key considerations are these: 

B Spending on health care has generally grown much faster than the economy as a 

whole, and that trend has continued for decades. In part, that growth reflects the 

improving capabilities of medical care—which can confer tremendous benefits by 

extending and improving lives. Studies attribute the bulk of cost growth to the 

development of new treatments and other medical technologies, but features of the 

health care and health insurance systems can influence how rapidly and widely new 

treatments are adopted.

B The high and rising costs of health care impose an increasing burden on the federal 

government as well as state governments and the private sector. Under current 

policies, CBO projects, federal spending on Medicare and Medicaid will increase 

from about 5 percent of gross domestic product (GDP) in 2009 to more than 

6 percent in 2019 and about 12 percent by 2050. Most of that increase will result 

from growth in per capita costs rather than from the aging of the population. In 

the private sector, the growth of health care costs has contributed to slow growth 

in wages because workers must give up other forms of compensation to offset the 

rising costs of employment-based insurance. 

B The available evidence also suggests that a substantial share of spending on health 

care contributes little if anything to the overall health of the nation, but finding 

ways to reduce such spending without also affecting services that improve health 

will be difficult. In many cases, the current system does not create incentives 

for doctors, hospitals, and other providers of health care—or their patients—to 

control costs. Significantly reducing the level or slowing the growth of health 

care spending below current projections would require substantial changes in 

incentives. Given the central role of medical technology in cost growth, reducing 

or slowing spending over the long term would probably require decreasing the 

pace of adopting new treatments and procedures or limiting the breadth of their 

application. 
3

CBO

Third, controlling costs and improving efficiency present many challenges, but there 

are a number of approaches about which many analysts would probably concur: 

B Many analysts would agree that payment systems should move away from a fee-forservice design and should instead provide stronger incentives to control costs, 

reward value, or both. A number of alternative approaches could be considered—

including fixed payments per patient, bonuses based on performance, or penalties 

for substandard care—but their precise effects are uncertain. Policymakers may 

thus want to test various options (for example, using demonstration programs in 

Medicare) to see whether they work as intended or to determine which design features work best. Almost inevitably, though, reducing the amount that is spent on 

health care will involve some cutbacks or constraints on the number and types of 

services provided relative to currently projected levels.

B Many analysts would agree that the current tax exclusion for employment-based 

health insurance—which exempts most payments for such insurance from both 

income and payroll taxes—dampens incentives for cost control because it is openended. Those incentives could be changed by replacing the tax exclusion or restructuring it in ways that would encourage workers to join health plans with higher 

cost-sharing requirements and tighter management of benefits. (Given stronger 

incentives, the competition among health plans for enrollees could then determine 

the optimal mix of payment systems for providers.) 

B Many analysts would agree that more information is needed about which treatments work best for which patients and about what quality of care different doctors, hospitals, and other providers deliver. The broad benefits that such 

information provides suggest a role for the government in funding research on the 

comparative effectiveness of treatments, in generating measures of quality, and in 

disseminating the results to doctors and patients. But absent stronger incentives to 

control costs and improve efficiency, the effect of information alone on spending 

will generally be limited. 

B Many analysts would agree that controlling federal costs over the long term will be 

very difficult without addressing the underlying forces that are also causing private 

costs for health care to rise. Private insurers generally have more flexibility than 

Medicare’s administrators to adapt to changing circumstances—a situation that 

policymakers may want to remedy—but changes made in the Medicare program 

can also stimulate broader improvements in the health sector. 
4

CBO

Fourth, many of the steps that analysts would recommend might not yield substantial 

budgetary savings or reductions in national spending on health care within a 10-year 

window—and others might increase federal costs or total spending—for several 

reasons: 

B In some cases, savings may materialize slowly because an initiative is phased in. For 

example, Medicare could save money by reducing payments to hospitals that have a 

high rate of avoidable readmissions (for complications following a discharge) but 

would have to gather information about readmission rates and notify hospitals 

before such reductions could be implemented. More generally, the process of converting innovative ideas into successful programmatic changes could take several 

years. Of course, for proposals that would increase the budget deficit, phase-in 

schedules reduce the amount of the increase that is captured in a 10-year budget 

window.

B Even if they generate some offsetting savings, initiatives are not costless to implement. For example, expanding the use of disease management services can improve 

health and may well be cost-effective—that is, the value of the benefits could 

exceed the costs. But those efforts may still fail to generate net reductions in spending on health care because the number of people receiving the services is generally 

much larger than the number who would avoid expensive treatments as a result. 

In other cases, most of the initial costs would be incurred in the first 10 years, but 

little of the savings would accrue in that period.

B Moreover, the effect on the federal budget of a policy proposal to encourage certain 

activities often differs from the impact of those activities on total spending for 

health care. For example, a preventive service could be cost-reducing overall, but if 

the government began providing that service for free, federal costs would probably 

increase—largely because many of the payments would cover costs for care that 

would have been received anyway. 

B In some cases, additional steps beyond a proposal are needed for the federal government to capture savings generated by an initiative. For example, requiring that hospitals adopt electronic health records would reduce their costs for treating Medicare 

patients, but the program’s payment rates would have to be reduced in order for the 

federal government to capture much of those savings.

B Savings from some initiatives may not materialize because incentives to reduce 

costs are lacking. For example, proposals to establish a “medical home” might 

have little impact on spending if the primary care physicians who would coordinate 

care were not given financial incentives to economize on their patients’ use of services. Those proposals could increase costs if they simply raised payments to those 

primary care physicians.
5

CBO

B In some cases, estimating the budgetary effects of a proposal is hampered by limited evidence. Studies generally examine the effects of discrete policy changes but 

typically do not address what would happen if several changes were made at the 

same time. Those interaction effects could mean that the savings from combining 

two or more initiatives will be greater than or less than the sum of their individual 

effects. 

Finally, I offer some observations on the issues that arise when trying to expand coverage and reduce costs at the same time: 

B By themselves, steps to substantially expand coverage would probably increase total 

spending on health care and would generally raise federal costs. Those federal costs 

would be determined primarily by the number of people receiving subsidies of 

their premiums and the average amount of the subsidy. Steps that reduced the costs 

of the health insurance policies would limit the federal costs of providing premium 

subsidies but could not eliminate those costs. 

B An expansion of coverage could be financed in a number of ways. One option is to 

limit or eliminate the current tax exclusion for employment-based health insurance. The savings from taking such steps would grow steadily because the revenue 

losses that stem from that exclusion are rising at the same rate as health care costs. 

The same can generally be said about using reductions in Medicare or Medicaid 

spending to offset the costs of expanding insurance coverage. Those methods of 

financing could adversely affect some people’s current coverage, however, and other 

financing options that would either raise revenues or reduce other spending are also 

available. 

On a broad level, many analysts agree about the direction in which policies would 

have to go in order to make the health care system more cost-effective: Patients and 

providers both need stronger incentives to control costs as well as more information 

about the quality and value of the care that is provided. But much less of a consensus 

exists about crucial details regarding how those changes are made—and similar disagreements arise about how to expand insurance coverage. In part, those disagreements reflect different values or different assessments of the existing evidence, but 

often they reflect a lack of evidence about the likely impact of making significant 

changes to the complex system of health insurance and health care. 

CBO’s Recent Volumes on Health Care

Concerns about the number of people who are uninsured and about the rising costs 

of health insurance and health care have given rise to proposals that would substantially modify the U.S. health insurance system and that seek to reduce federal or total 

spending for health care. The complexities of the health insurance and health care 

systems pose a major challenge for the design of such proposals and inevitably raise 
6

CBO

questions about their likely impact. To assist the Congress in its upcoming deliberations, CBO has produced two major reports that address such proposals. 

The December 2008 report titled Key Issues in Analyzing Major Health Insurance 

Proposals describes the assumptions that CBO would use in estimating the effects of 

various elements of such proposals on federal costs, insurance coverage, and other outcomes. It also reviews the evidence upon which those assumptions are based and, if 

the evidence points to a range of possible effects rather than a precise prediction, the 

factors that would influence where a proposal falls within the range. The report does 

not provide a comprehensive analysis of any specific proposal; rather, it identifies and 

examines many of the critical factors that would affect estimates of a variety of proposals. In particular, it considers the types of issues that would arise in estimating the 

effects of proposals to: 

B Provide tax credits or other types of subsidies to make insurance less expensive to 

the purchaser; 

B Require individuals to purchase health insurance, typically paired with a new 

system of government subsidies; 

B Require firms to offer health insurance to their workers or pay into a fund that 

subsidizes insurance purchases;

B Replace employment-based coverage with new purchasing arrangements or provide 

strong incentives for people to shift toward individually purchased coverage; or 

B Provide individuals with coverage under, or access to, existing insurance plans such 

as the Medicare program, either as an additional option or under a “Medicare-forall” single-payer arrangement. 

Wherever possible, the analysis describes in quantitative terms how CBO would estimate the budgetary and other effects of such proposals. In other cases, it describes the 

components that a proposal would have to specify in order to permit estimation of 

those effects. The report reflects the current state of CBO’s analysis of and judgments 

about the likely response of individuals, employers, insurers, and providers to changes 

in the health insurance and health care systems. Certainly, the details of particular 

policies and the way in which they are combined, as well as new evidence or analysis 

related to the issues discussed here, could affect CBO’s estimates of the effects of largescale health insurance proposals. 

The December 2008 report titled Budget Options, Volume 1: Health Care, comprises 

115 discrete options to alter federal programs, affect the private health insurance market, or both. It includes many options that would reduce the federal budget deficit 

and some that would increase it. Although similar to CBO’s previous reports on budget options, this volume reflects an extensive and concerted effort to substantially 
7

CBO

expand the range of topics and types of proposals considered and includes estimates of 

many approaches that the agency had not previously analyzed. (Volume 2, containing 

budget options that are not related to health care, is forthcoming.) The report is organized thematically, rather than by program, and covers the following areas: 

B The private health insurance market and the tax treatment of health insurance;

B Changing the availability of health insurance through existing federal programs;

B The quality and efficiency of health care and geographic variation in spending for 

Medicare;

B Paying for services in Medicare, Medicaid, and the Children’s Health Insurance 

Program (CHIP); 

B Premiums and cost sharing in federal health programs;

B Long-term care;

B Health behavior and health promotion; and 

B Closing the gap between Medicare’s spending and receipts.

The options that were included stem from a variety of sources, including extensive 

discussions with Congressional staff; reviews of legislative proposals, the President’s 

budget, and academic literature; and analyses conducted by CBO staff, other government agencies, and private groups. Although the number of health-related policy 

options is significantly greater than in previous Budget Options volumes, it is not 

an exhaustive list. CBO’s estimates are sensitive to the precise specifications of 

each option and could change in the future for a variety of reasons, including changes 

in economic conditions or other factors that affect projections of baseline spending 

or the availability of new evidence about an option’s likely effects. It should also be 

noted that the options’ effects may not be additive; that is, there could be important 

interaction effects among options that make their cumulative impact larger or smaller 

than the sum of the estimates. Some of the options that are particularly complex may 

be candidates for demonstration projects or pilot programs, which could help resolve 

the uncertainty about their effects.1

The remainder of my testimony largely summarizes the conclusions reached in the 

Key Issues volume. Those conclusions—and the background information and evidence 

1. Estimates of the impact on revenues of proposals to change the federal tax code are prepared by the 

staff of the Joint Committee on Taxation (JCT) and would be incorporated into any formal CBO 

estimate of a proposal’s effects on the federal budget. For its recent reports on health care, CBO 

consulted with JCT about the behavioral considerations that are incorporated into both agencies’ 

estimates, and JCT prepared the revenue estimates for several of the options.
8

CBO

on which they are based—are also relevant to much of CBO’s analysis for the Budget 

Options volume. Although summarizing all 115 options would not be feasible here, 

my testimony highlights some of the agency’s main findings. 

Background on Spending and Coverage

Spending on health care and related activities will account for about 18 percent of 

GDP in 2009—an expected total of $2.6 trillion—and under current law that share 

is projected to reach 20 percent by 2017. Annual health expenditures per capita are 

projected to rise from about $8,300 to about $13,000 over that period. Federal 

spending accounts for about one-third of those totals, and federal outlays for the 

Medicare and Medicaid programs are projected to grow from about $720 billion in 

2009 to about $1.4 trillion in 2019. Over the longer term, rising costs for health care 

represent the single greatest challenge to balancing the federal budget. (For additional 

discussion, see the November 2007 CBO report The Long-Term Outlook for Health 

Care Spending.) 

The number of people who are uninsured is also expected to increase because health 

insurance premiums are likely to continue rising much faster than income, which will 

make insurance more difficult to afford. As noted above, CBO estimates that the average number of nonelderly people who are uninsured will rise from at least 45 million 

in 2009 to about 54 million in 2019. The estimate for 2009 does not reflect the 

recent deterioration in economic conditions, which could result in a larger uninsured 

population, nor does it take into account recently enacted legislation. 

Employment-Based Insurance

For several reasons, most nonelderly individuals obtain their insurance through 

an employer, and employment-based plans now cover about 160 million people, 

including spouses and dependents. One fundamental reason such plans are popular 

is that they are subsidized through the tax code—because nearly all payments for 

employment-based insurance are excluded from taxable compensation and thus are 

not subject to income and payroll taxes. Another factor is the economies of scale that 

larger group purchasers enjoy, which reduce the average amount of administrative 

costs that are embedded in premiums; partly as a result, large employers are more 

likely than small employers to offer insurance to their workers. Overall, about threefourths of workers are offered employment-based insurance and are eligible to enroll 

in it. 

Another commonly cited reason for the popularity of employment-based policies is 

that employers offering coverage usually pay most of the premium—a step they take 

partly to encourage broad enrollment in those plans, which helps keep average costs 

stable. Ultimately, however, the costs of those employers’ payments are passed on to 

employees as a group, mainly in the form of lower wages. 
9

CBO

Other Sources of Coverage

Other significant sources of coverage for nonelderly people include the individual 

insurance market and various public programs. Roughly 10 million people are covered by individually purchased plans, which have some advantages for enrollees; for 

example, they may be portable from job to job, unlike employment-based insurance. 

Even so, individually purchased policies generally do not receive favorable tax treatment. In most states, premiums may vary to reflect an applicant’s age or health status, 

and applicants with particularly high expected costs are generally denied coverage. 

Another major source of coverage is the federal/state Medicaid program and the 

related but smaller CHIP. Both programs provide free or low-priced coverage 

for children in low-income families and (to a more limited degree) their parents; 

Medicaid also covers poor individuals who are blind or disabled. On average, 

Medicaid and CHIP are expected to cover about 43 million nonelderly people in 

2009 (and there are also many people eligible for those programs who have not 

enrolled in them).2 Medicare also covers about 7 million people younger than 65 who 

are disabled or have severe kidney disease. 

About 12 million people have insurance coverage from various other sources, including federal health programs for military personnel. The total number of nonelderly 

people with health insurance at any given point in 2009 is expected to be about 

216 million. 

Approaches for Reducing the Number of Uninsured People

Concerns about the large number of people who lack health insurance have generated 

proposals that seek to increase coverage rates substantially or achieve universal or nearuniversal coverage. Two basic approaches could be used: 

B Subsidizing health insurance premiums, either through the tax system or spending 

programs, which would make insurance less expensive for people who are eligible, 

or 

B Establishing a mandate for health insurance, either by requiring individuals to 

obtain coverage or by requiring employers to offer health insurance to their 

workers. 

By themselves, premium subsidies or mandates to obtain health insurance would 

not achieve universal coverage. Those approaches could be combined and could be 

implemented along with provisions to facilitate enrollment in ways that could achieve 

near-universal coverage. (Many of the issues and trade-offs that arise in designing such 

2. That figure represents average enrollment (rather than the number of people enrolled at any time 

during the year) and excludes nonelderly individuals living in institutions (such as nursing homes), 

people living in U.S. territories, and people receiving only limited benefits under Medicaid (such as 

family planning services). 
10

CBO

initiatives are also illustrated by the more incremental options to expand insurance 

coverage that are examined in the Budget Options volume.) 

Subsidizing Premiums

Whether new subsidies are delivered through the tax system or a spending program, 

several common issues arise. Trade-offs exist between the share of the premiums that 

is subsidized, the number of people who enroll in insurance as a result of the subsidies, and the total costs of the subsidies. As the subsidy rate increases, more people 

will be inclined to take advantage of them, but the higher subsidy payments will also 

benefit those who would have decided to obtain insurance anyway. Beyond a certain 

point, therefore, the cost per newly insured person can grow sharply because a large 

share of the additional subsidy payments is going to otherwise insured individuals. 

To hold down the costs of subsidies, the government could limit eligibility for subsidy 

payments to individuals who are currently uninsured. That restriction, however, 

would create incentives for insured individuals to drop their coverage. Some proposals 

might try to distinguish between people who become uninsured in response to subsidies and those who would have been uninsured in the absence of a government program (for example, by imposing waiting periods for individuals who were previously 

enrolled in an employment-based plan), but such proposals could be very difficult to 

administer. In addition, providing benefits only to the uninsured might be viewed as 

unfair by people with similar income and family responsibilities who purchased health 

insurance and would therefore be ineligible for the subsidies.

Another approach to limiting costs would target subsidies toward the lower-income 

groups, who are most likely to be uninsured otherwise, but such approaches can also 

have unintended consequences that affect the costs of a proposal. If eligibility was limited to people with income below a certain level, then those with income just above 

the threshold would have strong incentives to work less or hide income in order to 

qualify for the subsidies or maintain their eligibility. Phasing out subsidies gradually as 

income rises would reduce those incentives, but it would increase the amount of subsidy payments that go to individuals and families who would have had insurance in 

any event. 

Restructuring the Existing Tax Subsidies. Tax subsidies could be restructured 

to expand coverage in several ways. For example, the current tax exclusion for 

employment-based health insurance could be replaced with a deduction or tax 

credit to offset the costs of insurance, and tax subsidies could be extended to include 

policies purchased in the individual insurance market. That step would sever the link 

between employment and tax subsidies for private health insurance and could give 

similar people the same subsidy whether or not they were offered an employmentbased health plan. 

Deductions and credits differ, however, in their effectiveness at reaching the uninsured. An income tax deduction might provide limited benefits to low-income 
11

CBO

individuals because, like the existing exclusion, its value is less for those in lower tax 

brackets. In contrast, tax credits can be designed to provide lower- and moderateincome taxpayers with larger benefits than they would receive from tax deductions or 

exclusions. An important question regarding tax credits—particularly for lowerincome people who pay relatively little in income taxes and are also more likely to be 

uninsured—is whether the credits would be refundable and therefore fully available to 

individuals with little or no income tax liability. 

For the same budgetary costs, a refundable tax credit might be more effective at 

increasing insurance coverage, both because it can be designed to provide a larger benefit to low-income people than they receive under current law and because those 

recipients might be more responsive to a given subsidy than are people with higher 

income. Still, the effect on coverage rates might be limited if people do not receive 

refundable tax credits before their premium payments are due. 

Providing Subsidies Through Spending Programs. The government could seek to 

increase coverage rates by spending funds to subsidize insurance premiums. New subsidies could be provided implicitly by expanding eligibility for Medicare, Medicaid, or 

CHIP or explicitly by creating a new program. To hold costs down, benefits could be 

targeted on the basis of income, assets, family responsibilities, and insurance status. 

Targeting benefits, however, would require program administrators to certify eligibility and enforce the program’s rules, which would affect coverage and the program’s 

costs.

The Effects of Subsidy Proposals. Proposals to subsidize insurance coverage would 

affect decisions by both employers and individuals. Employers’ decisions to offer 

insurance to their workers reflect the preferences of their workers, the cost of the 

insurance that they can provide, and the costs of alternative sources of coverage that 

workers would have. Smaller firms appear to be more sensitive to changes in the cost 

of insurance than are larger employers. Subsidies that reduce the cost of insurance 

offered outside the workplace would cause some firms to drop coverage or reduce 

their contributions. When deciding whether to enroll in employment-based plans, 

workers would consider the share of the premium that they pay as well as the price 

and attractiveness of alternatives. The available evidence indicates that a small share of 

the population would be reluctant to purchase insurance even if subsidies covered 

nearly all of the costs. 

Related Budget Options. Several of the alternatives included in CBO’s Budget Options

volume highlight the potential effects of changing the tax treatment of health insurance. For example, Option 10 would replace the current exclusion from income taxes 

for employment-based health insurance with a tax deduction that phases out at higher 

income levels. That option would increase federal revenues by approximately 

$550 billion through 2018 (as estimated by the staff of the Joint Committee on 

Taxation). Because that option would increase the effective price of health insurance 

for higher-income taxpayers, it would, by CBO’s estimation, increase the number of 
12

CBO

uninsured people by about 1.5 million in 2014 (in part because some employers 

would decide to stop offering coverage). Those estimates are sensitive to the 

parameters of the deduction and particularly to the range of income over which 

the deduction is phased out. 

Other examples illustrate the effects on federal costs and coverage that stem from 

targeting different populations. Allowing low-income young adults to enroll in 

Medicaid, as described in Option 23, would cover about 1.1 million people in 2014, 

at a federal cost of about $22 billion over the 2010–2019 period, according to CBO’s 

estimates. Allowing low-income parents with children eligible for Medicaid to enroll 

in the program, as described in Option 24, would cost about $38 billion over the 

same period and would expand coverage to about 1.4 million parents and 700,000 

children in 2014. 

Another approach is illustrated by Option 7, which would create a voucher program 

to subsidize the purchase of health insurance for households with income below 

250 percent of the federal poverty level. Specifically, individuals would receive up to 

$1,500, and families would receive up to $3,000. According to CBO’s estimates, that 

approach would reduce the net number of uninsured people by about 2.2 million in 

2014. Overall, approximately 4 million people would use the voucher, but about 

1.7 million of those people would have had coverage in the individual health insurance market or through an employer. In addition, about 100,000 people would 

become newly uninsured as a result of small employers’ electing not to offer coverage 

because of the new voucher program. The total cost to the federal government of such 

a voucher program would be about $65 billion over the next decade. 

Mandating Coverage 

In an effort to increase the number of people who have health insurance or to achieve 

universal or near-universal coverage, the government could require individuals to 

obtain health insurance or employers to offer insurance plans. Employer mandates 

could include a requirement that employers contribute a certain percentage of the premium, which would encourage their workers to purchase coverage. To the extent that 

the required contributions exceeded the amounts that employers would have paid 

under current law, offsetting reductions would ultimately be made in wages and other 

forms of compensation. 

The impact of a mandate on the number of people covered by insurance would 

depend on its scope, the extent of enforcement, and the incentives to comply, as well 

as the benefits that enrollees received. Individual mandates, for example, could be 

applied broadly to the entire population of the United States or to a specific group, 

such as children; employer mandates might vary by the size of the firm. (Option 3 in 

the Budget Options volume is a specific requirement for large employers to offer coverage or pay a fee. Under the provisions of that option, the number of newly insured 

individuals would be relatively small, only about 300,000.)
13

CBO

Penalties would generally increase individuals’ incentives to comply with mandates, 

but when deciding whether to obtain insurance, people would also consider the likelihood of being caught if they did not comply. Data from the tax system and from 

other government programs, where overall rates of compliance range from roughly 

60 percent to 90 percent, indicate that mandates alone would not achieve universal 

coverage, largely because some people would still be unwilling or unable to purchase 

insurance. 

Facilitating Enrollment

Simplifying the process of enrolling in health insurance plans or applying for subsidies 

could yield higher coverage rates and could also increase compliance with a mandate 

to obtain coverage. One approach would be to enroll eligible individuals in health 

insurance plans automatically, giving them the option to refuse that coverage or to 

switch to a different plan. Automatic enrollment has been found to increase participation rates in retirement plans and government benefit programs. It requires the government, an employer, or some other entity to determine the specific plan into which 

people will be enrolled, however, and those choices may not always be appropriate for 

everyone.

Factors Affecting Insurance Premiums

Premiums for employment-based plans are expected to average about $5,000 per year 

for single coverage and about $13,000 per year for family coverage in 2009. Premiums 

for policies purchased in the individual insurance market are, on average, much 

lower—about one-third lower for single coverage and one-half lower for family policies. Those differences largely reflect the fact that policies purchased in the individual 

market generally cover a smaller share of enrollees’ health care costs, which also 

encourages enrollees to use fewer services. An offsetting factor is that average administrative costs are much higher for individually purchased policies. The remainder of 

the difference in premiums probably arises because people who purchase individual 

coverage have lower expected costs for health care to begin with. 

The federal costs of providing premium subsidies, and the effects of those subsidies on 

the number of people who are insured, would depend heavily on the premiums 

charged. Premiums reflect the average cost that any insurer—public or private—

incurs, and those costs are a function of several factors: 

B The scope of benefits the coverage includes and its cost-sharing requirements, 

B The degree of benefit management that is conducted,

B The administrative costs the insurer incurs, and 

B The health status of the individuals who enroll. 
14

CBO

Insurers’ costs also depend on the mechanisms and rates used to pay providers and on 

other forces affecting the supply of health care services. Proposals could affect many of 

those factors directly or indirectly. For example, the government might specify a minimum level of benefits that the coverage must provide in order to qualify for a subsidy 

or fulfill a mandate; such a requirement could have substantial effects on the proposal’s costs or its impact on coverage rates. 

Design of Benefits, Cost Sharing, and Related Budget Options

Health insurance plans purchased in the private market tend to vary only modestly 

in the scope of their benefits—with virtually all plans covering hospital care, physicians’ services, and prescription drugs—but they vary more substantially in their 

cost-sharing requirements. A useful summary statistic for comparing plans with different designs is their “actuarial value,” which essentially measures the share of health 

care spending for a given population that each plan would cover. Actuarial values for 

employment-based plans typically range between 65 percent and 95 percent, with an 

average value between 80 percent and 85 percent. Cost-sharing requirements for 

enrollees tend to be greater for policies purchased in the individual insurance market, 

where actuarial values generally range from 40 percent to 80 percent, with an average 

value between 55 percent and 60 percent. 

Public programs also vary in the extent of the coverage they provide. Medicaid 

requires only limited cost sharing (reflecting the low income of its enrollees); cost 

sharing under CHIP may be higher but is capped as a share of family income. 

Medicare’s cost sharing varies substantially by the type of service provided; for example, home health care is free to enrollees, but most hospital admissions incur a deductible of about $1,000. In addition, the program does not cap the out-of-pocket costs 

that enrollees can incur. Overall, the actuarial value of Medicare’s benefits for the 

nonelderly population is about 15 percent lower than that of a typical employmentbased plan. Those considerations would affect CBO’s analysis of proposals to expand 

enrollment in public programs. 

In general, the more comprehensive the coverage provided by a health plan, the higher 

the premium or cost per enrollee. Indeed, an increase in a health plan’s actuarial value 

would also lead enrollees to use more health care services. Reflecting the available evidence, CBO estimates that a 10 percent decrease in the out-of-pocket costs that 

enrollees have to pay would generally cause their use of health care to increase by 

about 1 percent to 2 percent. The agency would apply a similar analysis to proposals 

that included subsidies to reduce the cost-sharing requirements that lower-income 

enrollees face. 

Several budget options examine the effects of changing cost-sharing requirements in 

the Medicare program. Option 81 would replace the program’s current requirements 

with a unified deductible, a uniform coinsurance rate, and a limit on out-of-pocket 

costs. That option would reduce federal spending by about $26 billion over 10 years 

—mostly because of the increase in cost sharing for some services and the resulting 
15

CBO

reduction in their use. Option 83 would combine those changes in the Medicare 

program with limits on the extent to which enrollees could purchase supplemental 

insurance policies (known as medigap plans) that typically cover all of Medicare’s costsharing requirements. That option would reduce federal spending by about $73 billion over 10 years—with the added savings emerging because enrollees would be more 

prudent in their use of care once their medigap plans did not cover all of their costsharing requirements. Options 84, 85, and 86 would reduce federal outlays by imposing cost sharing for certain Medicare services that are now free to enrollees, and 

Option 89 would increase federal outlays by eliminating the gap in coverage (commonly called the doughnut hole) in the design of Medicare’s drug benefit. Options 95 

through 98 would reduce federal spending by introducing or increasing cost-sharing 

requirements for health care benefits provided to veterans, military retirees and their 

dependents, and dependents of active-duty personnel. 

Management of Benefits

Another factor affecting health insurance premiums and thus the costs or effects 

of legislative proposals is the degree of benefit and cost management that insurers 

apply. Nearly all Americans with private health insurance are enrolled in some type of 

“managed care” plan, but the extent to which specific management techniques are 

used varies widely. Common techniques to constrain costs include negotiating lower 

fees with a network of providers, requiring that certain services be authorized in 

advance, monitoring the care of hospitalized patients, and varying cost-sharing 

requirements to encourage the use of less expensive prescription drugs. Overall, CBO 

estimates, premiums for plans that made extensive use of such management techniques would be 5 percent to 10 percent lower than for plans using minimal management. Conversely, proposals that restricted plans’ use of those tools would result in 

higher health care spending than proposals that did not impose such restrictions.

Administrative Costs

Some proposals would affect the price of health insurance by changing insurers’ 

administrative costs. Some types of administrative costs (such as those for customer 

service and claims processing) vary in proportion to the number of enrollees in a 

health plan, but others (such as those for sales and marketing efforts) are more fixed; 

that is, those costs are similar whether a policy covers 100 enrollees or 100,000. As a 

result of those economies of scale, the average share of the policy premium that covers 

administrative costs varies considerably—from about 7 percent for employmentbased plans with 1,000 or more enrollees to nearly 30 percent for policies purchased 

by very small firms (those with fewer than 25 employees) and by individuals. 

Some administrative costs would be incurred under any system of health insurance, 

but proposals that shifted enrollment away from the small-group and individual 

markets could avoid at least a portion of the added administrative costs per enrollee 

that are observed in those markets. In general, however, substantial reductions in 

administrative costs would probably require the role of insurance agents and brokers 
16

CBO

in marketing and selling policies to be sharply curtailed and the services they provide 

to be rendered unnecessary. 

Spending by Previously Uninsured People

The impact that the mix of enrollees has on health insurance premiums is also an 

important consideration, particularly for proposals that would reduce the number of 

people who are uninsured. The reason is that the use of health care by the previously 

uninsured will generally increase when they gain coverage. On average, the uninsured 

currently use about 60 percent as much care as the insured population, CBO estimates, after adjusting for differences in demographic characteristics and health status 

between the two groups. 

On the basis of the research literature and an analysis of survey data, CBO estimates 

that enrolling all people who are currently uninsured in a typical employment-based 

plan would increase their use of services by 25 percent to 60 percent; that is, they 

would use between 75 percent and 95 percent as many services as a similar group of 

insured people. The remaining gap in the use of services reflects the expectation that, 

on average, people who are uninsured have a lower propensity to use health care, a 

tendency that would persist even after they gained coverage. For more incremental 

increases in coverage rates, CBO would expect that people who chose to enroll in a 

new program would be more likely to use medical care than those who decided not to 

enroll. 

In addition, recent estimates indicate that about a third of the care that the uninsured 

receive is either uncompensated or undercompensated—that is, they either pay nothing for it or pay less than the amount that a provider would receive for treating an 

insured patient. To the extent that such care became compensated under a proposal to 

expand coverage, health care spending for the uninsured would increase, regardless of 

whether their use of care also rose. 

Proposals Affecting the Choice of an Insurance Plan

The government could affect the options available to individuals when choosing a 

health insurance plan—and the incentives they face when making that choice—in a 

number of ways. In particular, proposals could establish or alter regulations governing 

insurance markets, seek to reveal more fully the relative costs of different health insurance plans, or have the federal government offer new health insurance options. 

The effects of proposals on insurance markets would depend on more than the impact 

they have on the premiums charged or on the share of the premium that enrollees 

have to pay; those effects would also reflect the market dynamics that arise as individuals shift among coverage options and as policy premiums adjust to those shifts. In 

particular, the risk that some plans would experience “adverse selection”—that is, that 

their enrollees will have above-average or higher-than-expected costs for health care—
17

CBO

has important implications for the operation of insurance markets and for proposals 

that would regulate those markets or introduce new insurance options. 

Insurance Market Regulations and Related Budget Options

Proposals could seek to establish or alter regulations governing the range of premiums 

that insurers may charge or the terms under which individuals and groups purchase 

coverage. Purchases in the individual insurance market and most policies for small 

employers are governed primarily by state regulations. Those regulations differ in the 

extent to which they limit variation in premiums, require insurers to offer coverage to 

applicants, permit exclusions for preexisting health conditions, or mandate coverage 

of certain benefits. Roughly 20 percent of applicants for coverage in the individual 

market have health problems that raise their expected costs for health care substantially, and in most states they may be charged a higher premium or have their application denied; as a result, premiums are correspondingly lower in those states for the 

majority of applicants. 

Proposals might seek to modify the regulation of health insurance markets in order to 

make insurance more affordable for people with health problems or to give consumers 

more choices, but those goals might conflict with each other. For example, limiting 

the extent to which premiums for people in poor health can exceed those for people in 

better health (as some states currently do) would reduce premiums for those who have 

higher expected costs for health care, but it would also raise premiums for healthier 

individuals and thus could reduce their coverage rates. Other proposals might counteract such limits on variations in premiums—for example, by allowing people to buy 

insurance in other states. That approach would enable younger and relatively healthy 

individuals living in states with tight limits to purchase a cheaper policy in another 

state. Older and less healthy residents who continued to purchase individual coverage 

in the tightly regulated states, however, would probably face higher premiums as a 

result. 

By themselves, changes in the regulation of the small-group and individual insurance 

markets would generally have modest effects on the federal budget and on the total 

number of people who are insured. Those budgetary effects would primarily reflect 

modest shifts into or out of Medicaid, CHIP, or employment-based coverage as those 

options became more or less attractive relative to coverage in the individual market. 

Proposals to require insurers to cover all applicants or to guarantee coverage of preexisting health conditions would benefit people whose health care would not be covered 

otherwise, but insurers would generally raise premiums to reflect the added costs. 

Another approach that has attracted attention recently involves so-called high-risk 

pools. Most states have established such pools to subsidize insurance for people who 

have high expected medical costs and have either been denied coverage in the individual insurance market or been quoted a very high premium. Overall participation in 

high-risk pools is limited—there are currently about 200,000 enrollees nationwide—

but proposals could seek to expand the use of those pools by providing new federal 
18

CBO

subsidies. The costs of such subsidies would depend primarily on the average health 

care costs of enrollees, the share of those costs covered by the pool, and the number of 

people who enrolled as a result. 

CBO analyzed several specific options related to the regulation of insurance markets 

in its Budget Options volume. For example, Option 2 would allow insurers licensed 

in one state to sell policies to individuals living in any other state and to be exempt 

from the regulations of those other states. Under that option, premiums would tend 

to rise for people with higher expected costs for health care living in states that tightly 

regulate insurance markets, and premiums would fall correspondingly for low-cost 

individuals in those states because some of them would find insurance policies with 

lower premiums sold in other states with looser regulations. As a result, according to 

CBO’s estimates, by 2014 about 600,000 people with relatively low expected health 

care spending would gain coverage and about 100,000 people with higher expected 

costs would drop their coverage. In addition, some firms would stop offering health 

insurance plans altogether, resulting in an additional loss of coverage for about 

100,000 employees and their dependents. Those changes in coverage would generate 

nearly $8 billion in additional federal revenues over 10 years, as some compensation 

shifted from untaxed health benefits to taxable wages. Among those who were no longer offered employment-based coverage, a small number would enroll in Medicaid 

causing roughly a $400 million increase in federal outlays over the 2010–2019 period.

Option 6 would require states to use “community rating” of premiums for small 

employers who purchase coverage from an insurer—meaning that insurers would 

have to charge all applicants the same per-enrollee premium for a given policy. Under 

that option, total enrollment in the small-group health insurance market would fall by 

about 400,000 (or roughly 1 percent of current enrollment) in 2014, reflecting the 

net effect of both increased enrollment by people with high expected costs and 

decreased enrollment by people with low expected costs. The budget deficit would be 

reduced by about $5 billion over the next decade, largely as a result of higher tax revenues. Option 4 would require all states to establish high-risk pools and provide federal 

subsidies toward enrollees’ premiums. Enrollees would be responsible for paying premiums up to 150 percent of the standard rate for people of similar age. That option 

would increase the deficit by about $16 billion over the 2010–2019 period; on net, 

about 175,000 individuals who would have been uninsured otherwise would gain 

insurance coverage in 2014. 

Steps to Reveal Relative Costs

Some proposals would seek to restructure the choices that individuals face—and 

expose more clearly the relative costs of their health insurance options—either by 

reducing or eliminating the current tax subsidy for employment-based insurance or by 

encouraging or requiring the establishment of managed competition systems. Both 

approaches would provide stronger incentives for enrollees to weigh the expected benefits and costs of policies when making decisions about purchasing insurance. As a 
19

CBO

result, many enrollees would choose health insurance policies that were less extensive, 

more tightly managed, or both, compared with the choices made under current law. 

The current tax exclusion for the premiums of employment-based health plans provides a subsidy of about 30 percent, on average, if both the income and payroll taxes 

that are avoided are taken into account. Eliminating that exclusion, or replacing it 

with a fixed-dollar tax credit or deduction, would effectively require employees to 

pay a larger share of the added costs of joining a more expensive plan; conversely, 

employees would capture more of the savings from choosing a cheaper plan. As a 

result, according to CBO’s estimates, people would ultimately select plans with premiums that were between 15 percent and 20 percent lower than the premiums they 

would pay under current law. Less extensive changes, such as capping the amount that 

may be excluded at a certain dollar value, would have proportionally smaller effects on 

average premiums. 

The key features of a managed competition system involve a sponsor, such as an 

employer or government agency, offering a structured choice of health plans and making a fixed-dollar contribution toward the cost of that insurance. Enrollees would thus 

bear the cost of any difference in premiums across plans. In CBO’s estimation, a proposal requiring that approach would yield average premiums for health insurance that 

were about 5 percent lower than those chosen under current law. Proposals that also 

adopted other features of managed competition, such as standardization of benefits 

across plans and adjustments of sponsors’ payments to those plans to reflect the health 

risk of each enrollee, might yield more intense competition among plans and help 

avoid problems of adverse selection. 

Federally Administered Options and Related Budget Options

Under some proposals, the federal government would make available additional 

options for insurance—for example, by providing access to the private health plans 

that are offered through the Federal Employees Health Benefits (FEHB) program. 

The effects of that approach would depend critically on how the premiums for nonfederal enrollees were set. If insurers could charge different premiums to different 

applicants on the basis of their expected costs for health care, the option would resemble the current small-group and individual markets and thus would have little impact. 

Alternatively, if new enrollees were all charged the same premium, the FEHB plans 

would be most attractive to people who expected to have above-average costs for 

health care. If no subsidies were provided, the total premiums charged to nonfederal 

enrollees would probably be much higher than those observed in the program 

today—so the number of new enrollees would probably be limited. Depending on the 

specific features of such proposals, providing access to FEHB plans might not prove to 

be financially viable because of adverse selection into those plans. 

The government could also design an insurance option based on Medicare that would 

be made more broadly available, on a voluntary basis, to the nonelderly population. 

The federal costs per enrollee would depend primarily on the benefits that system pro-
20

CBO

vided; the rates used to pay doctors, hospitals, and other providers of health care; and 

the extent of any premium subsidies that were offered to enrollees—all of which could 

differ from Medicare’s current design. As for whether such a plan would be more or 

less costly than a private health insurance plan that provided the same benefits to a 

representative group of enrollees, the answer would vary geographically. Assuming 

that Medicare’s current rules applied, those costs would be comparable in many urban 

areas, but in other areas, the cost of the government-run plan would be lower (as is 

evident in the current program through which Medicare beneficiaries may enroll in a 

private health plan). At the same time, because Medicare currently provides broad 

access to doctors and hospitals and employs little benefit management, a Medicarebased option might attract relatively unhealthy enrollees, which could drive up its 

premiums, federal costs, or both. 

Many of the same considerations would arise in designing a single-payer, Medicarefor-all system, but that approach might raise some unique issues as well—and the 

scale of its impact on federal costs could obviously be much larger if nearly all of the 

population was covered. Enrollees could be offered a choice of plans under a singlepayer system (as happens in Medicare). If, instead, only one design option was offered 

and all residents were required to enroll in it, then concerns about adverse selection 

would not arise. That approach could also reduce the administrative costs that doctors 

and hospitals currently incur when dealing with multiple insurers. The lack of alternatives with which to compare that program, however, could make it more difficult to 

assess the system’s performance. More generally, that approach would raise important 

questions about the role of the government in managing the delivery of health care.

Under the provisions of Option 27 in the Budget Options volume—which would 

allow individuals and employers to buy into the FEHB program—CBO estimates 

that about 2.3 million people would enroll in 2014, of whom about 1.3 million 

would have been uninsured otherwise. The new program would constitute a separate 

insurance risk pool for nonfederal enrollees, and their premiums would not be the 

same as those for federal employees. However, premiums would be the same for all 

nonfederal enrollees within each plan in a particular geographic area and would be 

structured so that they did not lead to any new outlays by the federal government. 

The estimate reflects an assessment that the individuals who enrolled in the program 

would have greater-than-average health risks, which would lead to higher premiums 

than if the entire eligible population had enrolled in the program. Although considerable uncertainty exists about the financial viability of FEHB plans in such a program, 

CBO estimated that features such as an annual open-enrollment period, limited 

exclusions of coverage for preexisting health conditions, and participation by small 

employers would limit adverse selection and yield a stable pool of enrollees. The buyin option would increase the deficit by almost $3 billion from 2010 to 2019, reflecting the net effect of reduced revenues (from a shift in employers’ compensation to 

nontaxable health insurance) and reduced outlays from lower enrollment in Medicaid.
21

CBO

Option 18 would establish a Medicare buy-in program for individuals ages 62 to 64. 

CBO’s analysis reflects an assessment that the government could set a premium at a 

level such that the program was self-financing; that is, the premium would not be subsidized (and a mechanism would be established to ensure that outcome). As with the 

option to buy into the FEHB program, CBO would expect the buy-in program to 

attract individuals with higher-than-average health risks. Although the program 

would be structured so that enrollees paid its full costs through their premiums, federal spending would increase by about $1 billion over 10 years because some people 

would choose to retire—and thus receive Social Security benefits—earlier than they 

would have otherwise. In a typical year of the buy-in program, CBO estimates, about 

300,000 people would participate, of whom 200,000 would otherwise have purchased individual coverage, 80,000 would have been uninsured, and 20,000 would 

have remained employed and had employment-based coverage. 

Factors Affecting the Supply and Prices of Health Care Services

The ultimate effects of proposals on the use of and spending for health care depend 

not only on factors that affect the demand for health care services, such as the number 

of people who are insured and the scope of their coverage, but also on factors that 

affect the supply and prices of those services. The various methods used for setting 

prices and paying for services, and the resulting payment rates, affect the supply of 

health care services by influencing the decisions that doctors, hospitals, and other providers of care make about how many patients to serve and which treatments their 

patients will receive. Average payment rates for Medicare, Medicaid, and private 

insurers also differ, which would affect the budgetary impact of proposals that shifted 

enrollees—and their costs—from one source of coverage to another. Changes in payment rates for public programs or in the amount of uncompensated care provided to 

the uninsured could also affect private payment rates. 

Payment Methods, Incentives for Providers, and Related Budget Options

Most care provided by physicians in the United States is paid for on a fee-for-service 

basis, meaning that a separate payment is made for each procedure, each office visit, 

and each ancillary service (such as a laboratory test). Hospitals are generally paid a 

fixed amount per admission (a bundled payment to cover all of the services that the 

hospital provides during a stay) or an amount per day. Such payments may encourage 

doctors and hospitals to limit their own costs when delivering a given service or bundle, but they can also create an incentive to provide more services or more expensive 

bundles if the additional payments exceed the added costs. 

Other arrangements, such as salaries for doctors or periodic capitation payments 

(fixed amounts per patient), do not provide financial incentives to deliver additional 

services. Those approaches raise concerns, however, about providers’ incentives to 

stint on care or avoid treating sicker patients. One study randomly assigned enrollees 

to different health plans and found that those in an integrated plan (which owns the 

hospitals used by enrollees and pays providers a salary) used 30 percent fewer services 
22

CBO

than enrollees in a fee-for-service plan, but whether those results could be replicated 

more broadly is unclear. 

Proposals could seek to change payment methods either indirectly or directly. They 

could change the payment methods used by private health plans indirectly by encouraging shifts in enrollment toward plans that have lower-cost payment systems. For 

public programs, such as Medicare and Medicaid, federal policymakers could directly 

change payment methods. In either case, making those changes could prove to be very 

difficult. 

Chapter 5 of CBO’s Budget Options volume examines a number of policies that could 

change the way that providers are paid and thus the incentives they have. Most of 

those options focus on Medicare, but other options address Medicaid or the larger 

health care system. Some options would involve relatively modest changes in payment 

methods, but others would make more dramatic changes to those methods and thus 

to incentives for providers. Given the significant uncertainty surrounding the effects 

of some approaches, a series of pilot projects or demonstration programs might provide valuable insights into how to design new payment systems to achieve lower 

spending while maintaining or improving the quality of care. 

Option 30, for example, would bundle Medicare’s payments for hospital and postacute care. Under the specifications of that option, federal spending would be reduced 

by about $19 billion over the 2010–2019 period, CBO estimates. That approach 

would constitute a significant change in the way Medicare pays for post-acute care 

(which includes services provided by skilled nursing facilities and home health agencies). Medicare would no longer make separate payments for post-acute care services 

following an acute care inpatient hospital stay. Instead, the unit of payment for acute 

care provided in hospitals would be redefined and expanded to include post-acute care 

provided both there and in nonhospital settings. Hospitals would have incentives to 

reduce the cost of post-acute care for Medicare beneficiaries by lessening its volume 

and intensity or by contracting with lower-cost providers.

Option 38 illustrates how Medicare could move away from fee-for-service payments 

to physicians in favor of a blend of capitated and per-service payments. That option 

would require the Centers for Medicare and Medicaid Services (CMS) to assign 

each beneficiary who participates in fee-for-service Medicare to a primary care 

physician. Those physicians would receive approximately three-fourths of their 

Medicare payments on a per-service basis and approximately one-fourth under a capitated arrangement; they would also receive bonuses or face penalties, depending on 

the total spending for all Medicare services incurred by their panel of beneficiaries. 

In response to the incentives created by that payment approach, physicians would 

probably try to reduce spending among their panel of patients in several ways—for 

example, by limiting referrals to specialists, increasing their prescribing of generic 

medications, and reducing hospitalizations for discretionary procedures. According 

to CBO’s estimates, this option would increase payments to physicians and decrease 
23

CBO

payments to all other Medicare providers, with a net federal savings of about $5 billion between 2010 and 2019. 

Payment Rates and Related Budget Options

The financial incentives created by different payment systems—and the spending 

amounts they yield—also depend on the level at which payment rates, or prices, are 

set. Those rates depend partly on the methods that are used to set them. Private-sector 

payment rates are set by negotiation, reflecting the underlying costs of the services 

and the relative bargaining power of providers and health plans; in turn, bargaining 

power depends on factors such as the number of competing providers or provider 

groups within a local market area. Fee-for-service payment rates in Medicare and 

Medicaid are generally set administratively. That method poses a number of challenges, including how to determine providers’ costs—particularly for services that 

require substantial training or that become cheaper to provide when they are performed more frequently. Additional issues include how to account for the quality of 

those services and their value to patients, and what impact rate setting might have on 

the development of new medical technology. 

On average, payment rates under Medicare and Medicaid are lower than private 

payment rates. Specifically, Medicare’s payment rates for physicians in 2006 were 

nearly 20 percent lower than private rates, on average, and its average payment rates 

for hospitals were as much as 30 percent lower. As for Medicaid, recent studies indicate that its payment rates for physicians and hospitals were about 40 percent and 

35 percent lower, respectively, than private rates. Within Medicare, and probably 

within Medicaid as well, those differentials vary geographically and tend to be larger 

in rural areas and smaller in urban areas (where competition among providers is generally greater). Given those differences, proposals that shifted enrollment between 

private and public plans could have a large impact on payments to providers and on 

spending for health care. Depending on how providers responded to those changes, 

enrollees’ access to care could be affected. 

Chapters 7 and 8 of the Budget Options volume examine a wide variety of ways in 

which payment rates for medical services and supplies could be changed under both 

the Medicare and Medicaid programs. In particular, Option 55 would reduce (by 

1 percentage point) the annual update factor under Medicare for inpatient hospital 

services; by CBO’s estimates, that change would yield $93 billion in savings over 

10 years. Option 59 includes several alternatives for increasing payment rates for physicians under Medicare, which (under current law) are scheduled to fall by about 

21 percent in 2010 and by about 5 percent annually for several years thereafter. The 

10-year cost of those alternatives ranges from $318 billion to $556 billion. 

Responses to Changes in Demand or Payment Rates

Changes in payment rates could also have an indirect effect on spending by altering 

the number of services that providers would be willing to supply. Similarly, the budgetary effects of covering previously uninsured individuals would depend not only on 
24

CBO

the resulting increase in their demand for care but also on how that increase affected 

the supply and prices of services. Because the number of U.S.-trained physicians that 

will be available to work over the next 10 years is largely fixed, supply adjustments in 

the short run would have to occur in other areas—which could include changes in the 

number of hours doctors worked or in their productivity, inflows of foreign-trained 

physicians, or changes in doctors’ fees and patients’ waiting times. 

Whether and to what extent the supply of physicians and other providers would 

become constrained also depends on the size of the increase in demand for their services and the amount of time available for adjustments to occur. CBO’s analysis 

indicates that providing the uninsured population with coverage that is similar to a 

typical employment-based plan would increase total demand for physicians’ services 

and hospital care by between 2 percent and 5 percent. If payment rates rose in 

response to that increase in demand, the impact on spending could be larger. Spending on behalf of previously uninsured people would also increase to the extent that the 

uncompensated care they had received became compensated. 

Uncompensated Care and Cost Shifting

Another issue that arises when analyzing payment rates is whether relatively low rates 

for public programs or the costs of providing uncompensated or undercompensated 

care to the uninsured lead to higher payment rates for private insurers—a process 

known as cost shifting. To the extent that such cost shifting occurs now, proposals 

that reduced the uninsured population or that switched enrollees from public to 

private insurance plans could affect private payment rates and thus alter insurance 

premiums. For that to occur, however, doctors and hospitals would have to lower the 

fees they charged private health plans in response to a decline in uncompensated care 

or an increase in their revenues from insured patients. 

Overall, the effect of uncompensated care on private-sector payment rates appears 

to be limited. According to one recent set of estimates, hospitals provided about 

$35 billion in uncompensated care in 2008, representing roughly 5 percent of their 

total revenues.3

 Roughly half of those costs may be offset, however, by payments 

under Medicare and Medicaid to hospitals that treat a disproportionate share of lowincome patients. Estimates of uncompensated care provided by doctors are considerably smaller, amounting to a few billion dollars, so the costs of providing such care do 

not appear to have a substantial effect on private payment rates for physicians. 

Whether and to what extent payments to hospitals under Medicare and Medicaid fall 

below the costs of treating those patients is more difficult to determine. Recent studies 

indicate, however, that when payment rates change under those programs, hospitals 

shift only a small share of the savings or costs to private insurers (the same logic would 

apply for uncompensated care). Instead, lower payment rates from public programs or 

3. Jack Hadley and others, “Covering the Uninsured in 2008: Current Costs, Sources of Payment, 

and Incremental Costs,” Health Affairs, Web Exclusive (August 25, 2008), pp. W399–W415. 
25

CBO

large amounts of uncompensated care may lead hospitals to reduce their costs, possibly by providing care that is less intensive or of lower quality than would have been 

offered had payments per patient been larger.

Administrative Issues and Effects on Other Programs

The extent to which proposals would affect health insurance coverage or federal 

budgetary costs, and the timing of those effects, would depend partly on the administrative responsibilities and costs that those proposals entailed and partly on their interactions with other government programs. Other factors would also affect coverage 

and costs, including the impact of any maintenance-of-effort provisions that might be 

applied to states or employers and the treatment of various segments of the population, including people who are ineligible for current government health programs and 

those who—although eligible—are generally difficult to reach and enroll.

Administrative Issues

Proposals could require both federal and state governments to assume new administrative responsibilities and could allocate those responsibilities to new or existing 

agencies. How well agencies fulfilled new missions—and how long it would take them 

to do so—would depend on the scope of the new responsibilities and the funding 

provided. Even with adequate funding, implementing a major initiative might take 

several years, as illustrated by the experience with the new Medicare drug benefit. One 

way to ease the implementation of a new federal program would be to build on existing programs; CHIP, for example, was implemented relatively rapidly because it 

largely built on the existing infrastructure of the state-operated Medicaid program. 

Maintenance-of-Effort Requirements

A proposal that created new subsidies for health insurance could lead employers 

or states to scale back the coverage that they sponsor, particularly if a new federally 

funded program provided similar or more generous benefits. To prevent such 

responses or offset their effects on federal spending, proposals could include 

maintenance-of-effort provisions. Monitoring and enforcing such requirements 

for private firms would be difficult, however, unless proposals specified effective 

reporting mechanisms and sufficient penalties for violations. 

States’ maintenance-of-effort provisions are generally structured in two ways: requiring states to maintain existing programs at historical eligibility or benefit levels (as is 

done under CHIP), or requiring states to continue spending funds at certain historical or projected levels or to return some of their savings to the federal government (as 

is done for the Medicare drug benefit). The effectiveness of such requirements would 

depend on how they were defined, the enforcement mechanisms that were specified, 

and the incentives for states to comply. The provisions for CHIP and the Medicare 

drug benefit are examples of effective approaches. 
26

CBO

Effects on Other Federal Programs

Proposals could also have unintended effects on eligibility for other federal programs 

that are not directly related to health care. New subsidies for health insurance might 

be counted as income or assets when determining eligibility for benefits in meanstested programs (such as the Supplemental Nutrition Assistance Program, formerly 

known as the Food Stamp program) unless explicitly excluded by law. Proposals that 

changed the employment-based health insurance system could shift compensation 

between wages and fringe benefits, thus affecting eligibility for government benefits 

(including Social Security) or tax credits (such as the earned income tax credit) that 

are based on cash earnings. Temporary or aggregate adjustments could be made to 

benefit formulas in order to minimize any adverse effects, but some recipients might 

still be made worse off. 

Treatment of Certain Populations

The treatment of certain populations would present various administrative challenges 

for proposals to expand coverage. Some individuals, including military personnel 

and veterans, already receive health benefits from the federal government, and issues 

might arise regarding the coordination of their current benefits with new federal 

subsidies. In other cases, federal health programs currently deny benefits to certain 

populations, such as unauthorized immigrants or prison inmates, and proposals 

would have to specify whether and how those restrictions would apply to new programs. Other populations, such as the homeless, face challenges enrolling in existing 

programs, and similar issues might arise in designing new subsidies for health insurance. Those considerations would affect both the costs of proposals and their overall 

impact on rates of insurance coverage. 

Changes in Health Habits and Medical Practices

In addition to any broader changes they make in the health insurance and payment 

systems, proposals could include specific elements designed to induce individuals to 

improve their own health or to encourage changes in how diseases are treated. 

Through a combination of approaches, proposals could try to change the behavior of 

both patients and providers by: 

B Promoting healthy behavior, including measures aimed at reducing rates of obesity 

and smoking; 

B Expanding the use of preventive medical care, which can either impede the development or spread of a disease or detect its presence at an early stage; 

B Establishing a “medical home” for each enrollee, typically involving a primary care 

physician who would coordinate all of his or her care; 
27

CBO

B Adopting “disease management” programs that seek to coordinate care for and 

apply evidence-based treatments to certain diseases, such as diabetes or coronary 

artery disease; 

B Funding research comparing the effectiveness of different treatment options, the 

results of which could help discourage the use of less clinically effective or less costeffective treatments; 

B Expanding the use of health information technology, such as electronic medical 

records, which would make it easier to share information about patients’ conditions and treatments; and 

B Modifying the system for determining and penalizing medical malpractice. 

Some of those initiatives could improve individuals’ health or enhance the quality 

of the care that they receive, but it is not clear that they also would reduce overall 

health care spending or federal costs. In its analysis of such initiatives, CBO considers 

the available studies that have assessed the particular approaches. In many cases, those 

studies do not support claims of reductions in health care spending or budgetary 

savings. 

Challenges in Demonstrating Savings

For several reasons, it may be difficult to generate reductions in health care spending 

from such initiatives. In some cases, the problem is largely one of identifying and targeting the people whose participation would cause health care spending to decline. 

Broad programs aimed at preventive medical care and disease management could 

reduce the need for expensive care for a portion of the recipients but could also provide additional services—and incur added costs—for many individuals who would 

not have needed costly treatments anyway. To generate net reductions in spending, 

the savings that such interventions generated for people who would have needed 

expensive care would therefore have to be large enough to offset the costs of serving 

much larger populations. 

A related issue is that many individuals or health plans might already be taking the 

steps involved (or will in the future) even in the absence of a new requirement or 

incentive. The effect of any proposal would have to be measured against that trend, 

and a large share of any subsidies involved might go to people who (or health plans 

that) would have taken those steps even if there were no requirements or incentives to 

do so. For example, some doctors and hospitals are already using electronic medical 

records, and more will adopt that technology in the future under current law, so new 

subsidy payments would go to many providers who would have purchased such systems anyway, and savings would accrue only for those providers who accelerated their 

purchases as a result of the subsidy. 
28

CBO

In other cases, the effect on health care spending depends crucially on whether 

doctors and patients have incentives to change the use of health care services. For 

example, studies may find that a given treatment has fewer clinical benefits or is less 

cost-effective (meaning that added costs are high relative to the incremental health 

benefits) for certain types of patients—but those results may not have a substantial 

effect on the use of that treatment unless the financial incentives facing doctors 

(through their payments) or patients (through their cost sharing) are aligned with the 

findings. Similarly, proposals to establish a medical home may have little impact on 

spending if the primary care physicians who would coordinate care were not given 

financial incentives to limit their patients’ use of other health services. 

Other types of initiatives might ultimately yield substantial long-term health benefits 

but might not generate much savings, at least in the short term. Even if successful, 

measures to reduce smoking and obesity—two factors linked to the development of 

chronic and acute health problems—might not have a substantial impact on health 

care spending for some time. In the long term, spending on diseases caused by poor 

health habits could decline substantially, but the impact on federal costs would also 

have to account for people living longer and receiving more in Medicare benefits (for 

the treatment of other diseases and age-related ailments) as well as other government 

benefits that are not directly related to health care (including Social Security benefits). 

Similarly, investments in health information technology might require substantial 

start-up costs that would be difficult to recapture in the typical 5- and 10-year 

budgetary time frames used to evaluate legislative proposals. 

Demonstrating savings might also be difficult because of data limitations and methodological concerns. For example, studies have found that tort limits, by reducing 

malpractice awards, cause premiums for malpractice insurance to fall and thus could 

have a very modest impact on doctors’ fees and health care spending. Some observers 

argue that tort limits would yield larger reductions in that spending because doctors 

would stop ordering unnecessary tests and taking other steps to reduce the risk of 

being sued. CBO has not found consistent evidence of such broader effects, but that 

may reflect the difficulty of disentangling the impact of changes to the medical malpractice system from other factors affecting medical costs. 

Related Budget Options

In its Budget Options volume, CBO estimated the effect of several approaches aimed at 

changing health habits or medical practice. For example, Option 106 would impose a 

new excise tax on sugar-sweetened beverages (equal to 3 cents per 12 ounces of beverage), which would raise about $50 billion in revenues from 2010 to 2019. CBO did 

not, however, estimate that spending on health care would be reduced under that 

option. After evaluating the available evidence, CBO could not establish causal links 

between lower consumption of sugar-sweetened beverages (which would occur under 

the option) and the use of health care. Studies indicate, for example, that people 

would offset the reduction in their consumption of such beverages with increases in 

consumption of other unhealthy foods—so the impact on obesity rates is not clear. In 
29

CBO

addition, even though obesity is associated with higher spending on health care, the 

effect of losing weight on spending for health care is more difficult to determine. 

CBO also analyzed the effects of establishing a “medical home” for chronically ill 

enrollees in the Medicare fee-for-service program (see Option 39). As designed, 

that option would increase Medicare spending by about $6 billion over 10 years 

because of the fees provided to practitioners who elected to become medical homes. 

Alternatively, approaches that would give primary care physicians a financial incentive 

to limit their patients’ use of expensive specialty care—such as the option imposing 

partial capitation, discussed above—could reduce Medicare spending (depending on 

the specific features of their design). In the realm of preventive medical care, CBO 

analyzed the impact of basing Medicare’s coverage of such services on evidence about 

their effectiveness (see Option 110). That option would save nearly $1 billion over 

10 years because it would lead the Medicare program to drop coverage for services 

that are currently covered even though an independent task force has recommended 

against their use (reflecting evidence that the preventive services are either ineffective 

or do more harm than good). 

Under Option 45, the federal government would fund research that compares the 

effectiveness of different medical treatments. The results of that research would gradually generate modest changes in medical practice as providers responded to evidence 

on the effectiveness of alternative treatments, the net effect of which would be to 

reduce total spending on health care in the United States; the resulting reductions in 

spending for federal health programs would partly offset the federal costs of conducting that research. Option 8 would impose specific limits on medical malpractice 

awards; the resulting reduction in premiums for malpractice insurance would yield 

reductions in the federal budget deficit of nearly $6 billion over 10 years. (CBO did 

not conclude that the option would have broader effects on the use of health care 

services.) 

Finally, Options 46 through 49 provide various approaches to increase the adoption 

of health information technology and electronic medical records. Option 46 would 

create incentives under the Medicare program to adopt that technology; the primary 

effects on federal outlays would stem from the payment of bonuses for adopting it or 

the collection of penalties for not doing so. Option 47 would require doctors and hospitals to use electronic health records in order to participate in Medicare. CBO judged 

that virtually all doctors and hospitals would adopt electronic health records as a 

result, reducing the federal budget deficit by about $34 billion over 10 years (or by a 

larger amount if Medicare’s payments to doctors and hospitals were also reduced to 

capture the resulting gains in their productivity). 
30

CBO

Effects on Total Health Care Spending, the Scope of the Federal 

Budget, and the Economy

Proposals that would substantially change the health insurance market could affect 

total spending on health care, the flow of payments between various sectors of the 

economy, and the operation of the U.S. economy. CBO will consider those effects in 

its analyses of major health care proposals. 

Effects on Total Spending and the Scope of the Federal Budget

Many health insurance proposals would have an impact on total spending for health 

care, and some might contain provisions that explicitly limit the level or rate of 

growth in health care spending; such proposals might impose a global budget or budgetary cap on all or a part of that spending. The effectiveness of such strategies would 

depend on several factors, including the scope of the global budget, the targets 

selected for different categories of spending, and the mechanisms used to enforce 

the caps. 

In addition to their overall effects on federal spending and revenues, proposals that 

made substantial changes to the health insurance system or its financing methods 

could raise a number of budgetary issues. Such proposals could have substantial effects 

on the flows of payments among households, employers, and federal and state governments—even if the proposals were budget neutral from a federal perspective. Some 

proposals might assign the federal government a more active role in the health insurance market; for example, the government could be required to disburse subsidies 

covering the cost of health insurance, collect health insurance premiums from policyholders, or make payments to insurers. Any of those changes might raise questions 

regarding who—the government, the insured, or the insurer—would bear financial 

responsibility for any shortfalls in payments that might occur. 

Other proposals might require that individuals or businesses make payments directly 

to nongovernmental entities. Depending on the specific provisions of such proposals, 

CBO might judge that payments resulting from federal mandates should be recorded 

as part of the federal budget even if the funds did not flow through the Treasury. The 

extent of federal control and compulsion is a critical element in determining budgetary treatment. In general, CBO believes that federally mandated payments—those 

resulting from the exercise of sovereign power—and the disbursement of those payments should be recorded in the budget as federal transactions.

Effects on the Economy

Proposals that made large-scale changes affecting the provision and financing of 

health insurance could also have an impact on the broader economy. Because most 

health insurance is currently provided through employers, proposals could affect labor 

markets by changing individuals’ decisions about whether and how much to work and 

employers’ decisions to hire workers. Such effects could arise in several ways: 
31

CBO

B Proposals that decreased the return from an additional hour of work, by imposing 

new taxes or phasing out subsidies or credits for health insurance as earnings rise, 

could cause some people to work fewer hours or leave the labor force. 

B Proposals that made health insurance less dependent on employment status could 

induce some people to retire earlier and others to change jobs more often. 

B Proposals that treated firms differently on the basis of such characteristics as the 

number of employees or average wages could affect the allocation of workers 

among firms. 

B Proposals that required employers to provide health insurance could adversely 

affect the hiring of employees earning at or near the minimum wage, because the 

total compensation of those workers could exceed their value to the firm.

Some observers have asserted that domestic firms providing health insurance to their 

workers incur higher costs for compensation than do competitors based in countries 

where insurance is not employment based and that fundamental changes to the health 

insurance system could reduce or eliminate that disadvantage. Although U.S. employers may appear to pay most of the costs of their workers’ health insurance, economists 

generally agree that workers ultimately bear those costs. That is, when firms provide 

health insurance, wages and other forms of compensation are lower (by a corresponding amount) than they otherwise would be. As a result, the costs of providing health 

insurance to their workers are not a competitive disadvantage for U.S.-based firms. 

In addition to their effects on the labor market, proposals could also affect the size 

of the nation’s stock of productive capital, especially through their effects on government budgets. Those effects would depend partly on how the costs of any insurance 

expansions or other changes were financed. The net effect on the economy of a broad 

proposal to restructure the health insurance system would, not surprisingly, depend 

crucially on the details.
CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director

U.S. Congress

Washington, DC 20515

June 16, 2009

Honorable Kent Conrad

Chairman

Committee on the Budget

United States Senate

Washington, DC 20510

Dear Mr. Chairman:

In the absence of significant changes in policy, rising costs for health care will

cause federal spending to grow much faster than the economy, putting the federal

budget on an unsustainable path. This letter responds to your request for

information about the features of reform proposals that would affect federal

spending on health care over the long term.

As you noted, many experts believe that a substantial share of spending on health

care contributes little if anything to the overall health of the nation. Therefore,

changes in government policy have the potential to yield large reductions in both

national health expenditures and federal health care spending without harming

health. Moreover, many experts agree on some general directions in which the

government’s health policies should move—typically involving changes in the

information and incentives that doctors and patients have when making decisions

about health care.

However, large reductions in spending will not actually be achieved without

fundamental changes in the financing and delivery of health care. The government

can spur those changes by transforming payment policies in federal health care

programs and by significantly limiting the current tax subsidy for health

insurance. Those approaches could directly lower federal spending on health care

and indirectly lower private spending on it as well. Yet, many of the specific

changes that might ultimately prove most important cannot be foreseen today and

could be developed only over time through experimentation and learning. Modest

versions of such efforts—which would have the desirable effect of allowing

policymakers to gauge their impact—would probably yield only modest results in

the short term.
Honorable Kent Conrad

Page 2

Therefore, one broad long-range approach for reform that has drawn interest

recently would combine specific policy actions—to generate near-term savings

and provide experience that would lay the groundwork for future savings—with a

mechanism or framework to impose ongoing pressure for achieving efficiencies in

the delivery of health care. The effectiveness of that path would depend ultimately

on the willingness of federal policy to maintain significant and systematic

pressure over time and would require tough choices to be made. Without

meaningful reforms, the substantial costs of many current proposals to expand

federal subsidies for health insurance would be much more likely to worsen the

long-run budget outlook than to improve it.

CBO does not provide formal cost estimates beyond the 10-year budget window

because the uncertainties are simply too great. However, in evaluating proposals

to reform health care, the agency will endeavor to offer a qualitative indication of

whether they would be more likely to increase or decrease the budget deficit over

the long term.

The attached analysis elaborates on these points. Please contact me at (202) 226-

2700 if you have any questions.

Sincerely,

Douglas W. Elmendorf

Director

Attachment

Identical letter sent to the Honorable Judd Gregg.
CONGRESSIONAL BUDGET OFFICE

Health Care Reform and the Federal Budget

June 16, 2009

Because the Congress is now considering major legislation affecting health care

and health insurance, the possible effects on the federal budget have received

significant attention. To elucidate those effects, this analysis examines the budget

outlook under current law; the likely budgetary effect of efforts to expand the

scope of insurance coverage; the potential for reducing health care spending; the

likely impact of specific changes in the health system; and mechanisms for

engendering efficiency gains in health care over time.

The Federal Budget Outlook

The federal budget is on an unsustainable path, primarily because of rapidly rising

spending on health care. Federal outlays for Medicare and Medicaid have

increased from 1 percent of gross domestic product (GDP) in 1970 to more than

5 percent in 2009; and the Congressional Budget Office (CBO) projects that under

current policy, they will exceed 6 percent of GDP in 2019 and about 8 percent in

2029. Most of that increase will result from rising costs per capita, rather than

from the aging of the population. As a result, the country faces difficult and

fundamental trade-offs between limiting the growth of Medicare and Medicaid

relative to GDP, accepting a continuing increase in taxes relative to GDP, and

reducing other spending relative to GDP, possibly to levels not experienced in this

country in more than 40 years.1

Moreover, serious fiscal imbalances are not a far-off problem. Under current law,

CBO projects, Medicare’s Part A trust fund—which pays for inpatient services,

post-acute care, and hospice services and receives revenues principally from the

payroll tax—will have insufficient funds to pay for all covered services starting in

2017. More broadly, federal debt held by the public is set to jump from 41 percent

of GDP at the end of 2008 to more than 60 percent by the end of 2010, the highest

level since the mid-1950s. Under CBO’s March baseline projection, the debt

would fall back below 60 percent of GDP in the second half of the decade, but the

baseline assumes that currently scheduled increases in tax rates will be allowed to

occur, even though policymakers seem intent on extending at least some of the

2001 and 2003 tax cuts. If those and all other expiring provisions were extended

1 The rapid growth of Medicare and Medicaid relative to the economy during the past four decades

has been, in a sense, “financed” by a significant reduction in defense spending relative to GDP.

Meanwhile, federal revenues and nondefense spending on other programs have grown about in

line with the economy, on average. However, with health care spending continuing to shoot up

and defense spending down to about 4 percent of GDP, the historical pattern cannot be repeated.
2

CBO

and the alternative minimum tax was indexed for inflation, the debt would

continue to rise relative to GDP throughout the next decade, reaching 86 percent

by 2019. Debt held by the public has not been that high since the years

immediately following World War II.

For many observers and policymakers, that grim outlook for the federal budget

during the next decade and beyond is an important motivation for crafting health

care reform and making other policy choices in a manner that significantly

reduces future deficits.

The Potential Impact of Expanding Health

Insurance Coverage on the Budget Outlook

The federal government’s financing of health care will total more than $1 trillion

in 2009, all told. Federal outlays for Medicare and Medicaid are about

$700 billion; tax preferences for health care (especially the exclusion of premiums

for employment-based health insurance from income and payroll taxes) amount to

more than $250 billion; and the federal government also pays for veterans’ health

care, public health initiatives, and other health programs. Already, those direct

and indirect payments for health care account for nearly 60 percent of total health

expenditures for the nation.

Many proposals to significantly expand insurance coverage would add to federal

costs by providing large subsidies to help lower-income individuals and families

purchase insurance. Those proposals would take several years to implement, but it

is useful to consider the budgetary implications if they were up and running now

so as to compare those costs to existing obligations. Depending on the specific

policies selected, the added cost could be on the order of $100 billion. In the

absence of specific constraints on growth, the new spending (or revenue losses, if

tax credits were used to provide subsidies) would probably increase over time

roughly with the underlying costs of health care and, thus, would grow about as

fast as spending on other federal health care programs.2

From that perspective, a large-scale expansion of insurance coverage would

represent a permanent increase of roughly 10 percent in the federal budgetary

commitment to health care. Improving the budget outlook therefore would require

that other aspects of an initiative on health care reduce the federal resources

2 Spending growth in some other federal health programs depends on the aging of the population

as well as the increase in age-adjusted health care costs. At the same time, the growth rate of

spending on insurance subsidies would depend on the design of the programs. If lower-income

households’ costs for insurance were capped at a fixed share of income, then federal spending

would rise faster than health care costs. Alternatively, subsidies for health insurance could be set

to increase more slowly than health care costs, although that approach would make insurance more

difficult for some households to afford over time. A reasonable assumption would therefore seem

to be that, absent structural reforms, costs in all of the federal health programs would grow at

roughly the same rate.
3

CBO

devoted to it by more than that amount (or that other federal spending or revenues

be adjusted to accomplish the same end).

By themselves, insurance expansions would also cause national spending on

health care to increase, in part because insured people generally receive somewhat

more medical care than do uninsured people—notwithstanding the fact that some

newly insured people would avoid expensive treatments by getting care sooner,

before their illness progressed.3 However, the rise in national spending on health

care would be less than the increase for the federal government because some

costs that are now paid by others would be shifted to the government (via the

subsidies provided by the proposal).

Expanding insurance coverage would make it modestly easier to achieve some

other reductions in national and federal spending on health care, but it would not

alter the fundamental nature of these challenges. Several issues are relevant:

■ Broader insurance coverage might lead to less cost shifting in the health care

system, but that effect would probably be relatively small and would not

directly produce net savings in national or federal spending on health care.

If more people had insurance, then the amount of uncompensated care would

decline. Some government payments designed to pay for part of that care

(such as “disproportionate share” payments to hospitals that treat many poor

patients) could be trimmed accordingly. And, to the extent that costs of

uncompensated care are currently shifted to private payers, some offsetting

savings could arise. However, undoing any current shifts of spending among

different payers would not change the growth rate of federal spending beyond

the first few years.

Moreover, uncompensated care is less significant than many people assume.

According to one study, hospitals provided about $35 billion in

uncompensated care nationwide in 2008—less than 2 percent of national

health expenditures—and the estimates are much smaller for other providers.4

The extent to which such costs are shifted to other payers is also uncertain;

well-structured studies have found modest effects.5 Further, some proposed

expansions of insurance coverage would broaden eligibility for Medicaid,

which might lead to additional cost shifting given Medicaid’s low payments to

providers.

3 See Congressional Budget Office, Key Issues in Analyzing Major Health Insurance Proposals

(December 2008), pp. 71–76.

4 Jack Hadley and others, “Covering the Uninsured in 2008: Current Costs, Sources of Payment,

and Incremental Costs,” Health Affairs, Web Exclusive (August 25, 2008), pp. W399–W415.

5 See Congressional Budget Office, Key Issues, pp.112–116.
4

CBO

■ In terms of the trajectory of spending, policymakers might be more willing to

slow the growth in payments to health care providers—and providers might be

more willing to accept slower growth—if they were not worried about the

possible impact of slower payment growth on access to medical care for

uninsured or underinsured people. (That effect could arise if cutbacks in

payment rates for insured patients led doctors or hospitals to limit their

provision of such care.) But budgetary savings from reducing payments to

providers would not occur automatically with broader insurance coverage;

they would arise only to the extent that legislation explicitly trimmed payment

rates relative to levels under current law.

■ Health care providers currently use resources looking for ways to receive

payments for treating uninsured people. In addition, insurers currently use

resources trying to determine the health of prospective customers and to avoid

paying for treatments that address preexisting conditions. Expanded insurance

coverage, together with the requirement that insurers provide coverage to all

applicants and the elimination of restrictions on preexisting conditions (two

features of many current insurance-market reform proposals), would save such

resources.

■ Currently, a significant share of the population moves in and out of insurance

coverage during a year, which complicates efforts to provide effective

prevention and wellness services. As discussed later, though, those services

are less broadly effective at reducing health care spending than might be

expected, and in any event, expansion proposals would not eliminate all of the

churning that makes it harder to maintain continuity of care.

■ Most expansions of insurance coverage that are under consideration would

leave a moderate number of people uninsured, in part because some people

would be ineligible for subsidies or would choose not to buy insurance even

with large subsidies. Therefore, any current problems arising from the lack of

insurance could be reduced but not eliminated.

It also bears emphasizing that if a reform package achieved “budget neutrality”

during its first 10 years, budgetary savings in the long run would not be

guaranteed—even if the package included initial steps toward transforming the

delivery and financing of health care that would gain momentum over time.

Different reform plans would have different effects, of course, but two general

phenomena could make the long-run budgetary impact less favorable than the

short-run impact:

■ First, an expansion of insurance coverage would be phased in over time to

allow for the creation of new administrative structures such as insurance

exchanges. As a result, the cost of an expansion during the 2010–2019 period

could be a poor indicator of its ultimate cost.
5

CBO

■ Second, savings generated by policy actions outside of the health care system

would probably not grow as fast as health care spending. Such would be the

case for revenues stemming from the Administration’s proposal to limit the

tax rate applied to itemized deductions and from proposals to tax sugarsweetened soda or alcohol, for example.

Some policy options under consideration would yield savings that grew in tandem

with health care spending—reducing the level of federal spending on health care

but not affecting the measured rate of spending growth after the first few years.

For example, the largest savings proposed in the President’s budget would arise

from a decrease in payments to private health insurance plans operating under the

Medicare Advantage program. If enacted, that change would permanently lower

the level of Medicare spending, but it would probably not offset a noticeably

larger share of the cost of an expansion of insurance coverage in the second

10 years than in the first.

Moreover, any savings in existing federal programs that were used to finance a

significant expansion of health insurance would not be available to reduce future

budget deficits. In light of the unsustainable path of the federal budget under

current law, using savings to finance new programs instead of reducing the deficit

would necessitate even stronger policy actions in other areas of the budget.

Potential Savings in Health Care

Given those challenges, a health care reform package would need to incorporate

very significant and fundamental changes in health care to truly improve the longrun budget outlook. Of course, projecting the effect of health policy changes into

the distant future is very difficult, partly because predicting how the practice of

medicine would evolve in the absence of those changes is difficult. Therefore,

experts generally focus on ways to reduce the growth of health care spending over

the next decade or two rather than over the very long run.

Policy changes that reaped significant savings quickly would lessen the mediumterm impact on the deficit that a large-scale expansion of insurance coverage

would have and could lay the groundwork for greater savings later. For example,

if the growth rate of federal health care spending was trimmed by 1 percent per

year during the next 20 years, the savings would roughly match the cost of an

expansion of insurance coverage by the end of the decade and would exceed that

cost in the next decade.

Significant savings seem possible because the available evidence implies that a

substantial share of spending on health care contributes little if anything to the

overall health of the nation. Therefore, experts generally agree that changes in

government policy have the potential to produce substantial savings in both

national and federal spending on health care without harming health. However,
6

CBO

turning that potential into reality in a sector that accounts for one-sixth of the U.S.

economy is likely to be a prolonged and difficult process.

Perhaps the most compelling evidence about the extent of inefficiency in the

health sector is that Medicare spending varies widely across different regions of

the country, but the variation is not correlated with available measures of the

quality of care or health outcomes. Researchers affiliated with the Dartmouth

Atlas of Health Care have compared the Medicare spending for enrollees across

the nation, controlling for demographic characteristics such as age, sex, and race.

According to those researchers’ calculations, Medicare spending could be reduced

by almost 30 percent if outlays in medium- and high-spending regions were

reduced to the average level in the lowest-spending decile.6

Comparisons of that sort are sensitive to the method of calculation. Some studies

have expressed skepticism about the Dartmouth researchers’ estimate.7 CBO’s

own informal comparison of per capita Medicare spending in metropolitan areas,

controlling for both the health status of individuals and the prices of health care

inputs, implies that the savings from turning medium- and high-spending areas

into low-spending areas might be roughly half of the estimate by the Dartmouth

researchers. In addition, much less is known about regional comparisons of

spending for and the health of patients outside the Medicare program. Still, most

experts conclude that both formal analysis and extensive anecdotal evidence of

regional differences in medical care and costs imply that a significant portion of

spending on health care is not serving its intended purpose. Moreover, the

delivery of health care in low-cost regions is not completely efficient now, so

further savings might be achievable even in those areas.

Many experts think that transformational changes in health care financing and

delivery could reduce the federal budgetary commitment to health by more than

the 10 percent increase that would result from a large-scale expansion of

insurance coverage. Achieving substantial and lasting savings, however, would

require fundamental changes in the organization and delivery of health care.

Examples of efficient care certainly exist today, with many individual health care

providers and groups of providers offering both high quality and relatively low

cost. Yet applying the methods of those efficient providers throughout the health

care system cannot be accomplished through fiat or good intentions. Instead, the

government controls two powerful policy levers for encouraging changes in

medical practice:

6 See John E. Wennberg and others, “Geography and the Debate Over Medicare Reform,” Health

Affairs, Web Exclusive (February 13, 2002), pp.W96–W114.

7 See, for example, Jack Hadley and others, Variations in Medical Care Spending per Medicare

Beneficiary: The First Stage of an Instrumental Variable Analysis (report submitted to the

Changes in Health Care Financing and Organization Program, Robert Wood Johnson Foundation,

May 2006).
7

CBO

■ Changes in Medicare could directly affect the efficiency of health care

delivered to older and disabled Americans. Changes in payment rules could

induce providers to offer higher-quality and lower-cost care (while ensuring

that efficiency gains were shared by the government), and changes in the

structure of benefits could give program beneficiaries stronger incentives to

choose less costly care. Improved efficiency within Medicare is likely to have

spillover effects on the efficiency of health care outside of the program.

■ Changes in the tax exclusion for employer-sponsored health insurance can

affect the efficiency of health care financed by the private sector, by giving

workers stronger incentives to seek lower-cost health insurance plans. Those

steps could well have spillover effects on Medicare.

Considerable consensus exists among experts about some types of changes that

are likely to make the health sector more efficient: move away from a fee-forservice system toward paying providers for value, perhaps through fixed

payments per patient, bonuses based on performance, or penalties for substandard

care; provide stronger incentives for both providers and patients to control costs,

through higher cost-sharing requirements or tighter management of benefits; and

facilitate good decisionmaking by providers and patients by equipping them with

more information about the effectiveness of different treatments and the quality of

care delivered by different providers. Those changes in the flow of money and

information would spur and facilitate other changes in the organization and

delivery of health care.

Unfortunately, little reliable evidence exists about exactly how to implement

those types of changes—especially at the level of specificity required for

legislation. A recent letter to the President from a group of stakeholders in the

health care industry reveals both the promise and the difficulty of achieving

substantial savings through health care reform: Those stakeholders see increased

efficiency as a critical goal of their organizations, and they agree that significant

savings can be obtained. At the same time, many of the group’s proposals offer

little detail about the specific changes necessary to achieve those objectives or the

obstacles to their making the changes.8

Policy Options That Could Produce

Budgetary Savings in the Long Run

A number of specific reforms show great promise for reducing federal spending

on health care over time without harming people’s health. However, at this point,

8 In particular, many of the proposals could be implemented without legislation, so they would not

affect the budgetary scoring of a reform proposal, although they might affect CBO’s baseline

projections of the costs of federal programs. See Congressional Budget Office, Response to

Questions About Health Care Industry Stakeholders’ Proposals, letter to the Honorable Dave

Camp (June 16, 2009).
8

CBO

experts do not know exactly how best to structure those reforms to achieve that

goal. They will need to learn through experimentation. In the meantime, any

particular approach to implementing such ideas might well yield less savings than

hoped for or might raise concerns about the impact on the quality of care and on

patients and providers.

CBO has analyzed a number of reform options in its recent publications,

including creating so-called accountable care organizations, bundling payments to

hospitals and other providers, providing additional information about effective

medical treatments, expanding the use of preventive and wellness services and

primary care, increasing cost sharing by patients, and modifying the tax treatment

of employment-based health insurance.9 When CBO evaluates policies, the

agency aims to reflect the middle of the range of expert opinion about likely

outcomes. For any particular policy option, CBO carefully reviews the relevant

empirical evidence and examines the incentives that would be created to control

costs and the factors that might limit the success of those incentives—as

illustrated in the following discussion.10

One general point worth emphasizing is that reform options may have different

effects on health and on the federal budget. Some policies, such as the increased

use of preventive services and the coordination of care, would have clearer

positive effects on health than on the federal budget balance. Other policies, such

as certain changes in Medicare’s payment methods, would have a direct impact on

federal spending, but their effect on health outcomes would be less clear. In part,

that uncertainty reflects the difficulty of measuring the quality of health care—a

situation that is likely to improve but which will take time to do so.

Create Accountable Care Organizations

In Medicare’s traditional fee-for-service program, providers have little or no

financial incentive to coordinate the care their patients receive across different

treatment settings or to be accountable for the costs and quality of that care. One

prominent example of a structure that may function better would be accountable

care organizations formed by physicians and other health care providers. Under

this model, providers would receive bonuses if they held down the total cost of

the services their patients received during a year while also meeting requirements

for the quality of the care; some versions would also impose penalties on doctors

who did not meet those targets.

Proponents contend that such groups would coordinate care more effectively,

which would improve patients’ health. In addition, the financial incentives would

9 See Congressional Budget Office, Budget Options, Volume 1: Health Care (December 2008) and

Key Issues.

10 See, for example, Congressional Budget Office, An Analysis of the Literature on Disease

Management Programs, letter to the Honorable Don Nickles (October 13, 2004).
9

CBO

reduce the unnecessary use of specialists and expensive tests and procedures.

Other initiatives, such as establishing “medical homes” for patients and

implementing care coordination or disease management, could also be pursued

more easily in this environment. Models of efficient health care today—including

the Mayo Clinic, Kaiser Permanente, and Geisinger—are integrated delivery

systems, and accountable care organizations have some of the same features.

A current demonstration project in Medicare (known as the Physician Group

Practice demonstration) is testing similar approaches for providing care, using

some of the integrated health systems noted above. However, the evidence for

cost savings is mixed. Moreover, expanding this approach to physicians who are

not already in an integrated system and may be reluctant to join one raises further

issues. For example, challenges arise when trying to design programs that are

voluntary for both enrollees and physicians, because both parties would generally

need to expect some gain in order to participate—often at the government’s

expense. Making such mechanisms mandatory, though, raises understandable

concerns.

Given the novelty of these organizations, a number of questions remain

unanswered about the structure and environment of them: How tightly would the

groups need to be integrated in order to achieve cost savings? How should

bonuses and penalties be set? Should payments to providers in the regular fee-forservice system be restrained in order to encourage them to join accountable care

organizations? Although many experts agree that this approach should be

vigorously pursued, several rounds of successive and significant changes and

refinements in Medicare’s rules would probably be necessary to yield substantial

budgetary savings.

Bundle Payments to Hospitals and Other Providers

A number of experts have proposed bundling Medicare’s payments for hospitals

and related services. (Payments are referred to as bundled when they cover

multiple individual services.) These proposals illustrate a common issue in

evaluating the budgetary effects of health care reform: Options that sound alike

may have quite different cost consequences if they employ different degrees of

aggressiveness in pursuing cost-saving goals.

CBO’s Budget Options volume included an option that would have hospitals

receive a single bundled payment from Medicare for both the hospital services

they provide and the care that their patients receive in a post-acute setting in the

30 days following their discharge. Hospitals already receive a fixed payment per

admission, but this arrangement would provide hospitals with a new incentive to

coordinate the care their patients receive after they are discharged and to

economize in the use of post-acute care. The payment amount would be adjusted

over time to capture part of the anticipated reduction in costs. CBO estimated that

this option would save about $19 billion over the 2010–2019 period.
10

CBO

The Commonwealth Fund also recently analyzed an option for bundling, one

considerably more aggressive in reducing spending and altering incentives for

providers.11 Under that option, successively more inclusive bundling would be

phased in: Initially, Medicare would bundle together payments for a hospital stay

and any readmissions within 30 days; after three years, the bundling would be

expanded to include post-acute care services as well; and after three more years,

the bundling would also include payments for physicians in the inpatient setting

and emergency room. Payment amounts would be reduced immediately upon

implementation and then would continue to be restrained over time to reflect

anticipated increases in efficiency from coordination among providers. The

Commonwealth Fund estimated that this proposal would reduce federal spending

by over $200 billion between 2010 and 2020.

Provide Additional Information About Treatments’ Effectiveness

Concerns about the limited evidence that is available to determine which

treatments are most effective for which patients has generated considerable

interest in expanding the supply and use of information that compares the

effectiveness of treatment options. (Limited evidence may help explain why the

use of certain treatments and the types of care provided vary widely from one area

of the country to another.) Many analysts believe that, because of the broad

benefits that additional information could provide, the federal government should

fund research on the effectiveness of treatments and should help disseminate the

results to doctors and patients.12

Merely conducting and disseminating additional research is unlikely to have

major effects on patterns of clinical practice or health care spending, however. For

new research to have a significant impact, providers’ financial incentives would

need to be aligned with the results. For example, legislation could allow the

Medicare program to limit or deny coverage for treatments that were found to be

less clinically effective or less cost-effective than other interventions.

Alternatively, Medicare could tie its payments to providers to the cost of the most

effective treatment, or patients could be required to pay for at least a portion of

the additional cost of less effective treatments. In all of these approaches, patients

and physicians could still choose the course of treatment they preferred, but

Medicare’s payments would depend on the broad results of research.

Further challenges in reaping net savings from comparative effectiveness research

arise from the cost of the research itself and from the lags in getting research

under way, developing results (particularly if they depend on new clinical trials),

11 See Stuart Guterman and others, Reforming Provider Payment: Essential Building Block for

Health Reform, The Commonwealth Fund, Commission on a High Performance Health System

(March 2009).

12 See Congressional Budget Office, Research on the Comparative Effectiveness of Medical

Treatments: Issues and Options for an Expanded Federal Role (December 2007). In addition to

evaluating medical treatments and procedures, such analysis could examine processes for

delivering care.
11

CBO

and disseminating the findings. Although those challenges do not undermine

experts’ support for additional research, they explain why such research might not

yield net budgetary savings within a 10-year budget window.

Expand the Use of Preventive and Wellness Services and Primary Care

Many proposals to modify the health insurance system include provisions to

expand the use of preventive and wellness services and the use of primary care.

Those changes could improve people’s health and the quality of care they receive.

For example, vaccines can prevent the spread of diseases; screening tests may be

able to detect illnesses at earlier and more treatable stages; and greater focus on

primary care can foster healthier behavior and better coordination of care.

Although those policies could also lead to less spending on health care, the impact

of specific preventive and wellness services on spending varies, depending on the

disease being targeted and the population receiving the services. Evidence

indicates that some preventive services (such as certain vaccines) reduce costs—

that is, the savings for those who avoid getting sick exceed the costs of providing

the intervention broadly. However, that outcome is far from universal: One study

of the health and economic effects of preventive services found that only

20 percent of the services that were assessed yielded net financial savings.13

Several factors make preventive care less broadly effective at reducing health care

spending than might be expected. For some preventive services, clinical evidence

on effectiveness is lacking: In its 2006 review of such evidence, the U.S.

Preventive Services Task Force was neutral toward—neither recommending nor

discouraging the use of—approximately 40 percent of the services it reviewed

because of a lack of evidence. For other preventive services, clinical evidence

shows benefits, but the cost of the intervention for the many people who might

receive it would exceed the likely savings for the relative few who would avoid

the disease as a result. In addition, a decision by the federal government to

subsidize preventive care might shift some costs to the government that would

otherwise be borne by the private sector.

A related issue is the ability of the federal government to reduce its spending on

health care by fostering healthier behavior and lifestyles. Reducing risk factors for

chronic diseases that afflict older Americans can reduce the prevalence of those

diseases and thereby the Medicare spending that goes to treat them. However, the

overall budgetary effect also depends on the cost to the government of the policies

that reduce risk, other health care costs that are incurred by people who live

longer, and additional Social Security benefits that are paid to people who live

longer. The relative magnitude of those effects varies for different diseases, and

research on the topic is limited. One recent study that incorporated the

interactions of different medical conditions and the cost of treating them—but did

13 Joshua T. Cohen and others, “Does Preventive Care Save Money? Health Economics and the

Presidential Candidates,” New England Journal of Medicine, vol. 358, no. 7 (February 14, 2008),

pp. 661–663.
12

CBO

not address Social Security outlays or the cost of risk-reducing policies—found

that controlling diabetes would increase medical costs and that controlling obesity

would reduce costs substantially.14 Unfortunately, the design and costs of

effective programs to reduce obesity are very unclear.

As with prevention, the budgetary impact of greater use of primary care would

depend on the combination of increases and decreases in spending occurred. One

study of the relationship between Medicare spending and the composition of the

workforce of physicians found that, with the total number of physicians held

constant, states with more general practitioners had lower spending.15 Achieving

that outcome, however, involves reducing the number of specialists in line with

increasing the number of primary care physicians, and the mechanism for

accomplishing that change (for example, the appropriate adjustments in payment

policies) is unclear. Savings would be less likely if the number of specialists

remained the same while the number of primary care physicians increased.

Increase Cost Sharing by Patients

Increasing the cost-sharing obligations that individuals face in government health

programs and private insurance would strengthen the incentives for them to use

medical care prudently. Research has shown that patients are responsive to the

price they pay for many aspects of care.16 To be sure, the rationale for insurance is

to limit patients’ out-of-pocket costs, so people with significant health problems

or with low income and few assets could not pay a large share of their health costs

themselves; cost sharing could be designed to maintain appropriate financial

protection while still creating some sensitivity to cost. In addition, maintaining

lower cost sharing for certain preventive services, medications to treat chronic

conditions, and other care that would reduce future spending (which falls under

the rubric of “value-based insurance design”) may make sense. Still, ensuring that

patients have some financial stake in decisions about treatment methods would

lead them to ask their doctors more questions about the effectiveness of different

tests and treatments and to make better-informed and more cost-sensitive

decisions about their care.

CBO’s Budget Options volume includes a number of approaches to modifying

cost sharing in the Medicare program. One option to increase cost-sharing

liabilities for most patients but place an upper cap on a patient’s total annual

liability was estimated to save $26 billion over 10 years. Making those changes

and simultaneously restricting the amount of cost sharing that could be covered by

14 Dana P. Goldman and others, “The Value of Elderly Disease Prevention,” Forum for Health

Economics & Policy, vol. 9, no. 2 (2006).

15 Katherine Baicker and Amitabh Chandra, “Medicare Spending, the Physician Workforce, and

Beneficiaries’ Quality of Care,” Health Affairs, Web Exclusive (April 7, 2004), pp. W184–W197.

16 See Joseph P. Newhouse and the Insurance Experiment Group, Free for All: Lessons from the

RAND Health Insurance Experiment (Cambridge, Mass.: Harvard University Press, 1993); and

Congressional Budget Office, Key Issues, pp. 73–74.
13

CBO

individually purchased supplemental (medigap) insurance nearly tripled the

estimated amount of budgetary savings. In addition, changing the tax treatment of

employment-based health insurance (discussed next) would encourage a higher

degree of cost sharing in private insurance, along with other effects.

Modify the Tax Treatment of Employment-Based Health Insurance

Nearly all analysts agree that the current tax treatment of employment-based

health insurance—which exempts most payments for such insurance from both

income and payroll taxes—dampens incentives for cost control because it is openended. Those incentives could be changed by restructuring the tax exclusion to

encourage workers to join health plans with lower premiums; those lower

premiums would arise through a combination of higher cost-sharing requirements

and tighter management of benefits.

CBO’s Budget Options volume discusses a number of such changes. One option

would replace the current tax exclusion with a refundable but more limited tax

credit. Another option would limit the amount of health insurance premiums that

could be excluded from income and payroll taxes to specific dollar amounts that

represented the 75th percentile of premiums paid by or through employers.17

These approaches would change workers’ incentives about how much insurance

to purchase and how much care to demand, and they would increase federal

revenues by several hundred billion dollars over 10 years.

Imposing Ongoing Pressure to Increase

Efficiency in the Health Care System

Vigorous implementation of specific reforms discussed in the preceding section

could save money for the federal government in the medium term; they could also

lay the groundwork for long-term savings. However, many of the reforms would

only reach fruition with substantial changes in how medicine is practiced.

Therefore, the largest savings would be reaped slowly, as experts learn more from

experience with innovative approaches to financing and delivering care and as

payment rules are adjusted to shift behavior further and capture savings for the

federal government.

To ensure that current legislation puts the federal budget on a more sustainable

path will probably require creating a framework for federal health care spending

that imposes ongoing pressure to increase efficiency over time—particularly but

not exclusively in the case of providers. Such pressure could be imposed in

several ways, including reducing Medicare’s payment updates automatically to

take account of expected productivity gains; reducing Medicare payments in

higher-spending areas of the country; giving the Secretary of Health and Human

Services broad discretion to change Medicare to produce savings, but imposing an

17 The dollar amounts in 2010 would be about $17,300 a year for family coverage and about

$6,800 a year for individual coverage.
14

CBO

across-the-board reduction in payments to providers if savings are not achieved in

other ways; and limiting the growth of Medicare’s implicit subsidy of premiums.

Yet for any of those approaches to work over time, the Congress would need to let

the legislated changes to payments take effect—even in the face of concerns from

providers and patients. If, instead, the Congress ended up relieving the pressure

by boosting payments, then the anticipated savings would prove to be illusory.

The repeated deferral of the cutbacks in payments to physicians called for by

Medicare’s sustainable growth rate mechanism is a cautionary example.

Reduce Annual Updates in Medicare’s

Payments to Reflect Expected Productivity Gains

Under current law, Medicare’s fee-for-service payments to caregivers in a variety

of facilities (including acute care and long-term care hospitals, outpatient

facilities, skilled nursing facilities, and home health agencies) are determined

according to preset fee schedules. The basic payment rates are updated annually

to reflect changes in the prices of various inputs (such as labor and equipment)

that are used to provide medical services. Those prices are measured by marketbasket indexes, which combine various price increases into a single update factor

for each type of provider. Each index is designed to approximate the changes in

costs that providers incur as a result of changes in input prices—under an

assumption that the quantity, quality, and mix of those inputs remain constant. To

the extent that providers increase their productivity over time—for example, by

using fewer inputs or a less expensive mix of inputs to produce the same or

greater output—the payment updates overstate the actual increases in costs.

Indeed, the Medicare Payment Advisory Commission (MedPAC) often

recommends that updates be set equal to changes in market-basket indexes less

overall productivity growth in the economy (as long as access to care and other

measures meet appropriate standards).

Some experts maintain that increased use of information technology and a new

focus on efficiency will yield substantial productivity gains in the health sector.18

Some of those gains may appear as reductions in the quantity of services and thus

yield savings automatically for the government. However, most of the gains are

likely to take the form of reduced costs per service, which would cut government

spending only if the government cut the prices it pays (and otherwise would end

up boosting providers’ profit margins).19 Imposing slower growth in payments

would create ongoing pressure on providers to identify and adopt efficiencies; it

would also, however, create risks for providers and patients if the efficiency gains

were not achieved.

18 See, for example, David Cutler, “Health System Modernization Will Reduce the Deficit,”

(May 11, 2009), available at www.americanprogressaction.org/issues/2009/05/pdf/health_

modernization.pdf.

19 For an illustration of that approach, see Option 54 in CBO’s December 2008 Budget Options

volume.
15

CBO

More generally, reducing payment updates in the fee-for-service Medicare system

could also prove to be a powerful mechanism for shifting providers into new

payment schemes and organizational arrangements. Anticipated large reductions

in payments to physicians under the sustainable growth rate mechanism, for

example, could provide an impetus to physicians to join accountable care

organizations, where they might receive bonuses for low-cost high-quality care.

However, the fact that the Congress has intervened to prevent past cuts in

payment rates that the mechanism would have caused makes it less likely that

physicians will believe that scheduled future reductions will actually occur.

Reduce Medicare Payments in Higher-Spending Areas

Another tack for applying ongoing pressure to restrain spending would be to

reduce Medicare payments, or the growth in those payments, in higher-spending

areas of the country. CBO recently examined several variants of this approach in

its Budget Options volume: reducing Medicare fees for physicians in highspending areas, reducing Medicare payments across the board in high-spending

areas, reducing Medicare’s payments to hospitals in areas with a high volume of

elective admissions, and imposing a surcharge on cost sharing by Medicare

beneficiaries in high-spending areas.

This approach would focus directly on reducing the geographical disparities that

currently exist in health care spending, although it would not target specific

medical providers or types of services that might be most responsible for the

differences in spending. As with reductions in payment updates, this approach

would create risks for providers and patients in higher-spending areas if the

efficiency gains were not achieved. The overall challenge in reducing the use of

care that seems to be wasteful is trying to distinguish that care from necessary

care, and that task is made only somewhat easier by focusing attention on

geographic areas where wasteful spending is more likely to be occurring.

Combine Increased Discretion to Change Medicare

With a Fallback If Savings Were Not Obtained

Another way to ensure significant savings in Medicare would be to give the

Secretary of Health and Human Services, the Administrator of the Centers for

Medicare and Medicaid Services, or some governmental entity broad discretion to

make changes in Medicare to produce savings—but also to impose an across-theboard reduction in payments to providers if sufficient savings were not achieved

in other ways.20

Many experts think that broader discretion for the administrators of Medicare

would help to encourage innovation and enhance efficiency in any event.

However, the fallback reductions in payments to providers would be crucial in

20 For an illustration of that approach, see Option 114 in CBO’s December 2008 Budget Options

volume.
16

CBO

encouraging providers to accept other changes in the program instead. Moreover,

as noted above, this mechanism and others in this section would only be effective

in the end if the Congress let the legislated reductions in payments take effect.

Limit the Growth of Medicare’s Subsidy of Premiums

One other mechanism for imposing ongoing pressure to achieve efficiencies in

Medicare would be to limit the growth of the program’s implicit subsidy of

premiums. If increases in medical costs beyond some threshold were borne at

least partly by Medicare beneficiaries rather than the government, the

government’s financial burden could be reduced. In addition, beneficiaries would

then face strong incentives to make informed, cost-sensitive decisions about their

medical care. Such changes could be designed to maintain greater protection for

older beneficiaries or beneficiaries with lower income.
ECONOMIC AND BUDGET ISSUE BRIEF

Effects of Changes to the Health Insurance System on 

Labor Markets

In the United States, health insurance coverage is linked 

to employment in ways that can affect both wages and the 

demand for certain types of workers. That close linkage 

can also affect people’s decisions to enter the labor force, 

to work fewer or more hours, to retire, and even to work 

in one particular job or another. 

Changes to the health insurance system could affect labor 

markets by changing the cost of insurance offered through 

the workplace and by providing new options for obtaining coverage outside the workplace. For example:

B Requiring employers to offer health insurance—or pay 

a fee if they do not—is likely to reduce employment, 

although the effect would probably be small.

B Providing new subsidies for health insurance that 

decline in value as a person’s income rises could discourage some people from working more hours.

B Increasing the availability of health insurance that is 

not related to employment could lead more people to 

retire before age 65 or choose not to work at younger 

ages. But it might also encourage other workers to take 

jobs that better match their skills, because they would 

not have to stay in less desirable jobs solely to maintain 

their health insurance. 

The overall impact on labor markets, however, is difficult 

to predict. Although economic theory and experience 

provide some guidance as to the effect of specific provisions, large-scale changes to the health insurance system 

could have more extensive repercussions than have 

previously been observed and also may involve numerous 

factors that would interact—affecting labor markets in 

significant but potentially offsetting ways.

The Current Link Between 

Employment and Health Insurance

In 2009, at least 150 million people under the age of 

65—or about three out of every five nonelderly Americans—are expected to have health insurance that is provided through an employer or other job-related arrangement, such as a plan offered through a labor union. That 

figure includes active workers, spouses and dependents 

covered by family policies, and retirees under the age 

of 65. The cost of that insurance is estimated to be, on 

average, $5,000 for a single plan and $13,000 for a family 

plan. For people whose income is at 300 percent of the 

federal poverty level (about $32,500 for a single person 

without children and $66,000 for a couple with two 

children), that cost represents between 15 percent and

20 percent of total income.

One reason employment-based plans are popular is that 

they are subsidized through the tax code—meaning that 

nearly all payments for employment-based insurance are 

excluded from taxable compensation and thus are not 

subject to income and payroll taxes. Another factor is the 

economies of scale that larger group purchasers have; such 

economies reduce the administrative costs embedded in 

policy premiums. Partly as a result, large employers are 

more likely than small ones to offer insurance to their 

workers.1

Another commonly cited reason for the popularity of 

employment-based insurance is that employers offering 

coverage usually pay a large share of the premiums. 

According to a survey of firms conducted in 2008, 

employers contributed 73 percent of the cost of a family 

CBO A series of issue summaries from

the Congressional Budget Office

JULY 13, 2009

1. As a result of those economies of scale, the average share of the 

policy premiums that covers administrative costs varies considerably—from about 7 percent for employment-based plans with 

1,000 or more enrollees to nearly 30 percent for policies purchased by very small firms (those with fewer than 25 employees) 

and by individuals.
2 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

policy for their workers and 84 percent of the cost of single coverage, on average.2

 Employers make those sizable 

contributions, in part, to encourage broad participation 

among their employees, so as to limit the potential for 

“adverse selection.” Otherwise, employers’ health plans 

might disproportionately attract enrollees whose health 

care costs are above average, causing average insurance 

premiums to rise to reflect the higher spending per 

enrollee.

Who Bears the Cost of Employment-Based Health 

Insurance?

Although employers directly pay most of the costs of their 

workers’ health insurance, the available evidence indicates 

that active workers—as a group—ultimately bear those 

costs.3

 Employers’ payments for health insurance are one 

form of compensation, along with wages, pension contributions, and other benefits. Firms decide how much labor 

to employ on the basis of the total cost of compensation 

and choose the composition of that compensation on the 

basis of what their workers generally prefer. Employers 

who offer to pay for health insurance thus pay less in 

wages and other forms of compensation than they otherwise would, keeping total compensation about the same. 

That relationship between employers’ contributions for 

health insurance and compensation can be difficult to 

observe. Firms offering health insurance actually tend to 

pay higher wages, on average, than firms that do not offer 

it. However, those differences in total compensation 

reflect such factors as disparities in the skill and productivity of workers, not the employers’ failure to pass on the 

costs of providing insurance.4

Health Insurance and the Decision to Work

In the current system, employment-based health insurance offers a number of advantages (including the ones 

listed above as well as coverage of existing medical conditions) that may be difficult or impossible for workers to 

obtain by purchasing insurance individually. For that reason, its availability can play an important role in people’s 

decisions to enter or remain in the workforce—especially 

those nearing retirement, who probably place a greater 

value on coverage of existing conditions than do their 

younger counterparts. People who are insured through 

their employer but are not offered health benefits after 

retirement have an additional incentive to remain 

employed until they qualify for Medicare at age 65. 

Workers whose health insurance will cover them in retirement tend to retire earlier, on average, than those without 

such benefits.5

 That conclusion has been reached by a 

number of studies using different estimating techniques. 

For example, studies that examined the correlation 

between health benefits and the probability of retirement, 

controlling for other factors, found that having health 

benefits in retirement increased the probability of retirement before age 65 by 30 percent to 80 percent. Studies 

using other estimating techniques generally found smaller 

results, and a few found little or no effect.6

 However, the 

weight of the evidence indicates that retirees’ health coverage probably leads to earlier retirement.

The availability of employment-based health insurance 

may also affect decisions by younger workers to enter or 

remain in the workforce. If primary earners are not 

offered family coverage through their employer, other 

members of their household may enter the workforce to 

obtain employment-based insurance. Some research indicates that spouses who are not covered under the primary 

earners’ insurance are more likely to be employed than are 

spouses who are covered through such a plan.7

Health Insurance and Choice of Jobs

Some of the same advantages of employment-based health 

insurance that may keep more people in the labor force 

2. Henry J. Kaiser Family Foundation and Health Research and 

Educational Trust (Kaiser/HRET), Employer Health Benefits: 2008

Annual Survey (Washington, D.C.: Kaiser/HRET, September 

2008).

3. For a discussion of that evidence, see Jonathan Gruber, 

“Health Insurance and the Labor Market,” in A.J. Culyer and 

J.P. Newhouse, eds., Handbook of Health Economics, vol. 1 

(Amsterdam: North Holland, 2006), pp. 645–706.

4. For further discussion of the incidence of employment-based 

health insurance, see Congressional Budget Office, Key Issues in 

Analyzing Major Health Insurance Proposals, pp. 4–8.

5. See, for example, Jonathan Gruber and Brigitte C. Madrian, 

Health Insurance, Labor Supply, and Job Mobility: A Critical Review 

of the Literature, Working Paper No. 8817 (Cambridge, Mass.: 

National Bureau of Economic Research, March 2002). 

6. One reason for the diversity of the results is the difficulty of controlling for other characteristics of workers; people choose their 

jobs partly on the basis of retirement benefits, and those who 

prefer early retirement may be more likely to choose a job that 

offers health coverage in retirement.

7. Gruber and Madrian, Health Insurance, Labor Supply, and Job 

Mobility.
ECONOMIC AND BUDGET ISSUE BRIEF

EFFECTS OF CHANGES TO THE HEALTH INSURANCE SYSTEM ON LABOR MARKETS 3

can also cause people to decide to work (or stay) at firms 

that offer health insurance rather than take a job that better matches their skills and interests but does not offer 

health insurance. In addition, those who have medical 

problems (or have family members with medical problems) have an incentive to stay in a job that provides 

health insurance in order to cover those preexisting conditions, even if more productive opportunities exist elsewhere—a phenomenon known as “job lock.” (Those 

opportunities could include working for a different 

employer or becoming an entrepreneur.) At the same 

time, people for whom health benefits have little value—

such as those who receive insurance coverage through a 

spouse’s employer—are more likely to take jobs that do 

not offer health insurance but that instead pay higher cash 

wages and salaries or provide other desired fringe benefits.

The evidence is mixed regarding the effects of 

employment-based health insurance on job turnover. 

Although some empirical studies conclude that workers 

are less likely to change jobs when faced with the potential 

loss of health insurance, others report little or no effect.8

Much of that evidence is difficult to interpret, however, 

because jobs that provide health insurance generally have 

other attributes that discourage turnover. 

Effects of Changes in the Health 

Insurance System on Labor Markets

Proposals to change the health insurance system may 

include many provisions that could affect outcomes in the 

labor market. Those provisions could impose new requirements on businesses, provide subsidies for individuals or 

small businesses, or affect the availability and cost of 

health insurance obtained through the individual market 

or through new purchasing pools (sometimes called 

exchanges, gateways, or connectors).

Imposing a Play-or-Pay Requirement on Employers

Some proposals would require employers to either play—

that is, contribute toward their workers’ cost of health 

insurance—or pay a fee to the government. Those proposals usually require employers to offer plans that meet 

certain standards; they also specify a minimum amount 

for employers’ contributions toward those plans.9 That 

fee could be a fixed dollar amount paid for each worker 

who was not offered health insurance; alternatively, it 

could be set at a percentage of earnings, so that the payment per worker would rise as his or her earnings 

increased—up to, perhaps, some threshold amount.10

Supporters of such play-or-pay requirements generally 

justify those provisions as a way to ensure that employers 

pay a portion of their employees’ health care costs, referring to those requirements in some cases as “employer 

responsibility payments.” However, if employers who did 

not offer insurance were required to pay a fee, employees’ 

wages and other forms of compensation would generally 

decline by the amount of that fee from what they would 

otherwise have been—just as wages are generally lower (all 

else being equal) to offset employers’ contributions toward 

health insurance.11

Play-or-pay requirements may have another rationale. 

They may encourage firms that currently offer health 

insurance plans to retain those plans in the future, despite 

the incentives created by other aspects of legislative proposals to drop such coverage; as a result, such provisions 

could reduce the budgetary costs of new subsidy programs. In June 2009, the Congressional Budget Office 

(CBO) analyzed title 1 of a draft of the Affordable Health 

Choices Act. That proposal contained generous subsidies 

for health insurance for families with income up to 

8. For a discussion of those studies, see Brigitte C. Madrian, 

The U.S. Health Care System and Labor Markets, Working Paper 

No. 11980 (Cambridge, Mass.: National Bureau of Economic 

Research, January 2006), p. 19.

9. In Massachusetts, for example, employers with more than 10 fulltime employees must make a “fair and reasonable” contribution to 

a qualifying health plan or pay an annual fee of up to $295 per 

full-time worker (roughly 15 cents an hour). The Senate Committee on Health, Education, Labor, and Pensions is considering 

legislation (the Affordable Health Choices Act) that would require 

firms to contribute at least 60 percent of the premiums for a qualifying plan or to pay $750 a year (or about 38 cents an hour) for 

each full-time worker. Different requirements would apply to 

part-time workers.

10. The House Tri-Committee Health Reform Discussion Draft 

includes a play-or-pay requirement for firms to contribute at least 

72.5 percent toward a worker’s premium (65 percent for family 

coverage) or pay a fee amounting to 8 percent of wages for each 

worker. For minimum-wage workers, that payroll tax would be 

roughly equal to 58 cents an hour. The requirements would be 

prorated for part-time workers.

11. The impact of the fee would be similar to that of employers’ 

contributions for payroll taxes. Most analysts agree that 

wages and benefits would fall by the amount of an increase in 

those contributions. 
4 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

500 percent of the federal poverty level but did not 

impose any play-or-pay requirements on employers. CBO 

concluded that the absence of such a play-or-pay requirement or other requirements for employers would have 

contributed to a noticeable decline in the number of people offered an employment-based plan.12 A subsequent 

version of that bill—containing a play-or-pay 

requirement and a smaller subsidy program—led to a 

much smaller estimated impact on the amount of coverage provided through employment-based plans.13

Although play-or-pay requirements may prevent the erosion of employment-based plans, they are likely to affect 

the labor market. Because employees largely bear the cost 

of health insurance or play-or-pay fees in the form of 

lower wages, the effects of those provisions on employment and hours worked is likely to be relatively minor. 

However, a play-or-pay requirement could affect the 

amount of work available for certain categories of workers. In particular, a play-or-pay provision could reduce the 

hiring of low-wage workers, whose wages could not fall by 

the full cost of health insurance or a substantial play-orpay fee if they were close to the minimum wage.14

The effect on employment would depend on the specifications of a play-or-pay requirement. Larger play-or-pay 

fees would tend to have a greater effect on employment; as 

the fees increased, more workers would be affected 

because their wages could not easily adjust without bumping into the minimum wage. The structure of the play-orpay requirement would also matter. In some proposals, for 

example, the fees imposed on employers would apply only 

to full-time workers who were not offered health insurance; in others, the fees would apply to all workers but 

would be lower for part-time or temporary workers. Such 

limitations would increase incentives for firms to replace 

full-time employees with more part-time or temporary 

workers. 

The effect of play-or-pay requirements on employment 

would also depend on the sensitivity of hiring decisions to 

changes in the minimum levels of compensation (including the minimum wage and the required levels of benefits). The impact of play-or-pay requirements on the 

employment of low-wage workers would be similar to the 

effects of raising the minimum wage—and the latter has 

been studied extensively. Although findings from those 

studies vary greatly, the weight of the evidence suggests 

that raising the minimum wage has a negative but small 

effect on the employment of low-wage workers.15

Several studies have used the findings from research on 

the minimum wage to estimate the effects of play-or-pay 

requirements on employment. One study estimated that 

224,000 workers (or about 0.2 percent of all privatesector full-time workers between the ages of 22 and 65) 

could become unemployed if firms were required to provide health insurance costing, on average, $2 per hour 

worked (or roughly $4,000 a year per employee).16 A 

second study found a larger effect—a potential loss of 

750,000 jobs—from a higher play-or-pay assessment 

($3 an hour, or $6,000 a year), but that estimate also 

included the effect of increasing the minimum wage from 

$5.15 (the minimum wage in 2004, the year of the study) 

to $7.25.17 That study also assumed that play-or-pay 

requirements applied to part-time workers as well as fulltime workers and that hiring decisions were somewhat 

more sensitive to changes in the minimum wage. Play-orpay proposals that imposed less hefty assessments would 

have a smaller effect on employment.

Other researchers have examined Hawaii’s experience with 

an employer mandate. Since 1975, employers in that state 

have been required to offer health insurance to their fulltime workers or pay a penalty.18 One study of that mandate found that the rate of employment grew faster in 

12. Congressional Budget Office, “Preliminary Analysis of Major 

Provisions Related to Health Insurance Coverage Under the 

Affordable Health Choices Act,” letter to the Honorable Edward 

M. Kennedy (June 15, 2009). 

13. Congressional Budget Office, “Affordable Health Choices Act,” 

letter to the Honorable Edward M. Kennedy (July 2, 2009).

14. The minimum wage is scheduled to increase from $6.55 to $7.25 

on July 24, 2009.

15. For a review of that literature, see David Neumark and William L. 

Wascher, “Minimum Wages and Employment,” Foundations and 

Trends in Microeconomics, vol. 3, no. 1-2 (2007), pp. 1–182.

16. Katherine Baicker and Helen Levy, Employer Health Insurance 

Mandates and the Risk of Unemployment, Working Paper 

No. 13528 (Cambridge, Mass.: National Bureau of Economic 

Research, October 2007). 

17. Richard Burkhauser and Kosali Simon, Who Gets What from 

Employer Pay or Play Mandates? Working Paper No. 13578 (Cambridge, Mass.: National Bureau of Economic Research, 2007).

18. The penalty paid for each day the firm does not offer health insurance to its full-time employees is the greater of $25 or $1 per 

employee not offered coverage. A firm that fails to provide coverage for more than 30 days may be shut down by the state.
ECONOMIC AND BUDGET ISSUE BRIEF

EFFECTS OF CHANGES TO THE HEALTH INSURANCE SYSTEM ON LABOR MARKETS 5

Hawaii than in the rest of the United States after the mandate was instituted, although that result may have been 

due to factors other than the mandate.19 Another study 

did not find any relationship between the mandate and 

employment levels in Hawaii but observed an increase in 

the employment of part-time workers—one of the categories of workers who were exempted from the mandate.20

Imposing a Surcharge on Employers Whose 

Workers Receive Health Care Subsidies

Some proposals have considered imposing surcharges on 

employers whose workers use health care that is subsidized 

by the government. In Massachusetts, employers can be 

required to pay a surcharge if employees and their dependents who are not offered a plan use, in total, more than 

$50,000 worth of care a year from a state-funded pool 

that was established to finance care for the uninsured. 

Other variants of surcharge proposals would require 

employers—even those that offer insurance to their 

employees—to pay all or a portion of certain health 

insurance subsidies that their workers received from the 

government. Supporters of such surcharges often refer to 

them as “free-rider” penalties. Although the surcharges 

would be imposed on the firms, workers in those firms 

would ultimately bear the burden of those fees, just as 

they would with play-or-pay requirements or premiums 

for employment-based health insurance.

The differences between the effects of play-or-pay requirements and employer surcharge provisions illustrate some 

of the trade-offs concerning the size and characteristics of 

the affected population. Relative to the broader-based 

play-or-pay requirements, employer surcharges tend to be 

more targeted, applying only to workers who are not 

enrolled in their employers’ plans and receive government 

subsidies for insurance obtained elsewhere. Many of those 

workers, however, are more likely to have earnings at or 

near the minimum wage, and the size of such surcharges—if based on the actual costs imposed on government programs—could be larger per affected worker than 

the assessments being considered in many play-or-pay 

requirements. As a result, the effects of an employer surcharge could be concentrated among workers whose 

wages could not easily adjust to absorb its full cost; such 

targeted provisions could therefore have a much larger 

impact on employment than a substantially smaller playor-pay fee affecting a broader base of workers. Moreover, 

the employment loss would be concentrated disproportionately among low-income workers who employers 

expected would be more likely to obtain subsidies from 

the government (for example, unmarried individuals who 

do not receive family coverage through a spouse’s job). 

At the same time, employer surcharge provisions, which 

would require government agencies to track subsidies to 

individuals and then identify which employers to bill, 

could be more difficult to implement than play-or-pay 

requirements, and those administrative hurdles might 

temper the effects of such provisions on employment. 

Employer surcharge provisions might also create greater 

uncertainty for firms because their liability would depend 

on whether workers chose a government-subsidized plan, 

obtained other coverage, or became uninsured.

Expanding or Creating Individual Subsidies for 

Health Insurance

Subsidies for health insurance coverage can affect people’s 

decisions about whether and how much to work. A subsidy can be provided through the transfer system (possibly 

as a voucher) or through the tax system (as an exclusion 

from income, a tax deduction, or a tax credit). A subsidy 

represents an increase in income, and some recipients may 

respond by working fewer hours (and thus offsetting part 

of the increase in subsidy income with a reduction in 

wage income). 

To limit costs, subsidies are typically phased out as a beneficiary’s income rises. Over the phase-out range, a worker 

receives less compensation for each additional hour 

worked, because each dollar earned reduces the subsidy. 

That effect, known as an “implicit tax,” can lead people to 

work fewer hours than they otherwise would, in the same 

way that income and payroll tax rates do. Most empirical 

studies conclude that increases in marginal tax rates generally reduce the number of hours worked, particularly 

among secondary earners (typically, the spouse of the 

main earner in a family).21 Higher tax rates also reduce 

people’s incentive to raise their income in other ways, 

19. Norman K. Thurston, “Labor Market Effects of Hawaii’s Mandatory Employer-Provided Health Insurance,” Industrial and Labor 

Relations Review, vol. 51, no. 1 (October 1997), pp. 117–135.

20. Thomas C. Buchmueller, John DiNardo, and Robert G. Valletta, 

The Effect of an Employer Health Insurance Mandate on Health 

Insurance Coverage and the Demand for Labor: Evidence from 

Hawaii, Working Paper No. 2009-08 (San Francisco, Calif.: Federal Reserve Bank of San Francisco, April 2009). 

21. See Congressional Budget Office, Labor Supply and Taxes (January 

1996). 
6 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

such as working harder in the hope of winning raises; 

accepting new positions or responsibilities with higher 

compensation; or investing in their future earning capacity through education, training, or other means.22

Policymakers face a trade-off in deciding how to phase out 

subsidies. If subsidies are large and are phased out quickly, 

the implicit tax rates, and thus the negative impact on 

work incentives, can be quite high. Implicit tax rates can 

be reduced by expanding the range over which the subsidy 

is phased out, but doing so increases the number of 

people subject to the implicit tax and boosts the total cost 

of the subsidy. In the extreme, the same subsidy can be 

granted to everyone, but doing so substantially increases 

budgetary costs, which might in turn be financed through 

higher explicit tax rates. Alternatively, a subsidy can be 

eliminated all at once at a certain income (creating a 

“cliff” in the relationship of subsidy to income), which 

eliminates the cost of phasing out the subsidy more gradually but, for people whose potential income is near the 

cliff, significantly increases the disincentives to work 

more. People whose income is just below the threshold 

can respond by not working more hours, and those whose 

income is just above the threshold may cut their hours of 

work in order to qualify for the subsidy.

One program that creates work disincentives for its recipients is Medicaid. That program is structured so that eligibility for benefits is completely eliminated at a specified 

income for most eligibility categories (a cliff).23 For individuals whose income is close to that threshold, working 

more and earning a higher income can lead to the loss of 

Medicaid benefits, creating a disincentive to work more. 

Proposals that would simply extend Medicaid eligibility to 

families whose income was slightly higher than allowed 

under current law would effectively move the cliff—

reducing disincentives to work for families at the current 

threshold but creating new disincentives for families 

whose income was somewhat higher. One study concluded that a series of increases in the income limit for 

Medicaid eligibility in the late 1980s and 1990s increased 

the labor force participation of working-age single mothers by a small but statistically significant amount.24 Creating new subsidies for health insurance for families above 

the eligibility thresholds for Medicaid would effectively 

reduce the size of current cliffs because people would 

become eligible for the new subsidies at the same time 

they became ineligible for Medicaid. 

New subsidies might be created to cover the costs of 

private health insurance, and they could be gradually 

reduced over a specified income range in a variety of 

ways—with different implications for marginal tax rates 

and work incentives. Those subsidies could be gradually 

reduced at a uniform rate, causing implicit marginal tax 

rates to rise by the same amount for all recipients in the 

phase-out range. For example, a proposal might provide 

families whose income was at the federal poverty level 

(roughly $23,000 for a family of four in 2013, the year in 

which many proposals would take effect) with fully subsidized health insurance valued at $15,000. That subsidy 

might be gradually reduced as income increased, and 

families whose income was above 400 percent of the 

poverty level ($92,000) might be ineligible for any subsidy. In that case, marginal tax rates would go up by about 

22 percentage points for all families whose income was 

between 100 percent and 400 percent of the poverty level.

An alternative approach would provide subsidies over the 

same income range but would link eligibility for those 

subsidies to an “affordability” standard that would limit 

the amount a family spent on health insurance premiums 

to a percentage of family income. For example, a family 

with income at the federal poverty level could be required 

to pay 1 percent of income but would receive a federal 

subsidy for the difference between the cost of their health 

insurance and the family’s required contribution. That 

cap on premiums could be set to rise with income—for 

example, increasing to 10 percent of income as the family’s income rose to 400 percent of the federal poverty 

level—and implicit marginal tax rates would also increase 

as income rose. An advantage of raising the cap is that 

22. Martin Feldstein, “Effects of Taxes on Economic Behavior,” 

National Tax Journal, vol. 61, no. 1 (March 2008), pp. 131–139.

23. Although eligibility for Medicaid varies by state, all states are 

required to cover pregnant women, children under age 6 whose 

family income is at or below 133 percent of the federal poverty 

level, and children who are at least age 6 but not yet 19 and whose 

family income is up to 100 percent of the federal poverty level. 

Some factors reduce the severity of the cliff: Eligibility for children 

can extend to higher income levels than eligibility for parents, so 

families do not lose all their benefits at once; and transitional 

medical assistance continues Medicaid eligibility temporarily for 

people whose earnings have risen to a level that would otherwise 

make them ineligible.

24. For estimates of the size of the effect on labor supply, see Aaron S. 

Yelowitz, “The Medicaid Notch, Labor Supply, and Welfare Participation: Evidence from Eligibility Expansions,” Quarterly Journal of Economics, vol. 110, no. 4 (November 1995), pp. 909–939.
ECONOMIC AND BUDGET ISSUE BRIEF

EFFECTS OF CHANGES TO THE HEALTH INSURANCE SYSTEM ON LABOR MARKETS 7

families with income below 200 percent of the poverty 

level—a group typically in the phase-out range for other 

income-related transfers and tax credits (such as the 

earned income tax credit)—would face smaller increases 

in marginal tax rates than under the approach that phased 

out subsidies uniformly over a broad income range. A disadvantage of that approach is that it could result in a cliff 

at the income level at which people were no longer eligible 

for a subsidy. Thus, a family whose income in 2013 was 

just over four times the federal poverty level and who paid 

$15,000 for insurance would pay 16 percent of income, 

compared with 10 percent if their income was slightly 

lower. That cliff, however, could be reduced or eliminated 

by either increasing the premium cap or extending the 

subsidy to families with slightly higher income.

Capping the Exclusion of Employment-Based 

Insurance

Some proposals would limit the current tax subsidy for 

health insurance by reducing the tax exclusion for 

employment-based health insurance—perhaps by capping 

the amount of payments that could be excluded from taxable income. Reducing that exclusion would make a larger 

share of compensation taxable. By itself, that change 

would reduce after-tax income, encouraging people to 

work more to make up for their lost earnings. Capping 

the exclusion would also affect the relative prices of goods: 

The effective price of health insurance would rise, making 

other goods relatively less expensive. For example, the 

price of leisure—a good that people “purchase” with forgone earnings by choosing to work less—would fall relative to the cost of health insurance. In the absence of other 

changes, an increase in the price of health insurance 

would tend to boost the consumption of other goods, 

including leisure. The net effect on labor supply of the 

reduction in income and the change in relative prices is 

uncertain and would depend on the details of the 

proposal.

Giving Preferential Treatment to Small Businesses

Many proposals to change the health insurance system 

would give small businesses subsidies or other types of 

preferential treatment. Subsidies based on a firm’s size 

might be intended to help “level the playing field” 

between large and small firms, whose costs for providing 

health insurance differ, but they could also create a competitive advantage for small firms. Similarly, proposals 

that exempted small businesses from play-or-pay requirements, or lowered the assessments imposed on those 

firms, could favor employment in such firms. 

The responses to such incentives could take several 

forms—some involving actions by workers, some involving actions by firms, and some involving actions by both 

parties. For example, workers might prefer to take jobs 

with smaller firms to take advantage of the new subsidies. 

Similarly, firms might take steps to become smaller (or 

avoid actions that might expand their workforces). For 

example, firms could outsource—that is, lay off employees and contract with other, smaller companies for the 

same services. Alternatively, they could divide themselves 

into subsidiaries with smaller workforces. One study 

examined the impact of state regulations governing health 

insurance plans offered by small groups and found a clustering of firms just under the statutory thresholds (for 

example, 25 employees) in states with rules that favored 

small firms, suggesting that some employers might have 

adjusted their size to take advantage of the preferential 

treatment of smaller firms.25

A firm seeking to reorganize in response to such incentives, however, could face high barriers to that process. It 

might find that keeping all of its workers within the same 

entity was more efficient. Employee benefit laws also limit 

the extent to which firms can treat employees differently 

across subsidiaries. Certain features of proposals—such as 

limiting subsidies only to the smallest firms or capping 

the average wages of workers in eligible firms—might 

make it more difficult for firms to reorganize or for workers to move to smaller firms. Administering subsidies for 

small businesses, however, might be challenging, because 

it would be difficult for government agencies to monitor 

the size of firms—providing opportunities for some firms 

to claim subsidies for which they were not eligible.

Enhancing the Individual Insurance Market or 

Creating Exchanges

Proposals might increase the attractiveness of health insurance coverage that is not provided through employers, 

even though those proposals might still retain current tax 

subsidies for employment-based insurance. For example, 

some proposals would establish exchanges where people 

could shop for insurance. Insurance obtained through 

exchanges could provide some of the advantages of 

employment-based insurance, including lower administrative costs. Another common feature of many proposals 

25. Kanika Kapur and others, Do Small Group Health Insurance 

Regulations Influence Small Business Growth? Working Paper 

No. WR-351-ICJ (Santa Monica, Calif.: Rand Institute for Civil 

Justice, May 2006).
8 CONGRESSIONAL BUDGET OFFICE

ECONOMIC AND BUDGET ISSUE BRIEF

is the provision of subsidies that would help cover the 

costs of health insurance purchased through exchanges. 

Other changes to the insurance market—prohibiting 

insurers from denying coverage to people because of their 

preexisting conditions or limiting how much insurers 

could vary prices with the age or health status of insured 

individuals—would also make insurance in the exchanges 

or individual market more affordable for less healthy or 

older individuals. 

By making insurance obtained outside the workplace 

more attractive, those provisions could cause some 

people to retire early. In its 2008 report Budget Options, 

Volume 1: Health Care, CBO analyzed an option that 

would allow people between the ages of 62 and 64 to buy 

into Medicare coverage. Under that option, participants 

would pay premiums equal to the average cost of benefits 

for program participants plus a 5 percent administrative 

fee. CBO estimated that the number of retired individuals 

would increase by roughly 20,000 as a consequence. That 

option, however, did not include subsidies to cover the 

costs of Medicare premiums or restrictions on how much 

premiums could vary with the age of enrollees—two 

features that would increase the attractiveness of the 

“bridge” coverage. 

Increasing the availability of health insurance from 

sources other than employers could also reduce the participation of some younger workers in the labor force, especially those for whom gaining employer-based insurance is 

a major motivation for working; however, that effect 

would probably not be large. The impact on participation 

would probably be greatest among secondary earners 

because they tend to be more responsive to changes in the 

marginal benefit of working than are primary earners. 

Proposals that increased the availability of health insurance from other sources could also reduce job lock and, 

potentially, lead to better matches of workers to jobs.

Effects of Changes to the Health 

Insurance System on International 

Competitiveness 

Some analysts have argued that domestic firms offering 

health insurance to their workers face higher costs for 

compensation than do competitors based in countries 

where insurance is not related to employment and that 

fundamental changes to the health insurance system could 

reduce or eliminate that disadvantage. However, such a 

cost reduction is unlikely to occur, except in the short run, 

primarily because the costs of fringe benefits are largely 

borne by workers in the form of lower cash wages. Other 

economic factors (including tax rates and currency values) 

are likely to have a larger impact on a nation’s competitiveness in the world market.

To be sure, workers’ cash compensation might not 

increase immediately by the full amount of any reduction 

in employers’ payments for health insurance. For that reason, firms that currently contribute toward the costs of 

their workers’ health benefits could temporarily reap some 

savings in labor costs if changes to the health insurance 

system resulted in their workers receiving subsidized coverage in some other way. But those firms would experience no permanent change in their competitive status.

In at least one circumstance, firms might find it difficult 

to adjust wages as health care costs increased or declined. 

Some firms have commitments to cover the health care 

costs of their retirees, and those commitments may not be 

fully funded. Reducing those legacy costs could ease the 

financial strain on those firms. Stockholders could benefit, but whether lower costs would enhance the firms’ 

competitiveness would depend on how firms used those 

additional savings. If those retiree benefits were the result 

of collective bargaining on behalf of both active workers 

and retirees, active workers might bear the costs of those 

benefits—but they might also capture any savings resulting from reductions in those costs. 

This brief was prepared by Janet Holtzblatt and 

Benjamin Page. It and other CBO publications are 

available at the agency’s Web site (www.cbo.gov).

Douglas W. Elmendorf

Director
www.cbo.gov

CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director

U.S. Congress

Washington, DC 20515

August 7, 2009

Honorable Nathan Deal

Ranking Member

Subcommittee on Health

Committee on Energy and Commerce

U.S. House of Representatives

Washington, DC 20515

Dear Congressman:

This letter responds to the question you asked at a July 16, 2009, committee

markup concerning the Congressional Budget Office’s (CBO’s) analysis of the

budgetary effects of proposals to expand governmental support for preventive

medical care and wellness services. Specifically, you asked whether the agency’s

scoring methods reflect potential reductions in federal costs from improvements

in health that might result from expanded support for those activities.1

Preventive Medical Care

Preventive medical care includes services such as cancer screening, cholesterol

management, and vaccines. In making its estimates of the budgetary effects of

expanded governmental support for preventive care, CBO takes into account any

estimated savings that would result from greater use of such care as well as the

estimated costs of that additional care. Although different types of preventive care

have different effects on spending, the evidence suggests that for most preventive

services, expanded utilization leads to higher, not lower, medical spending

overall.

That result may seem counterintuitive. For example, many observers point to

cases in which a simple medical test, if given early enough, can reveal a condition

that is treatable at a fraction of the cost of treating that same illness after it has

progressed. In such cases, an ounce of prevention improves health and reduces

spending—for that individual. But when analyzing the effects of preventive care

on total spending for health care, it is important to recognize that doctors do not

know beforehand which patients are going to develop costly illnesses. To avert

one case of acute illness, it is usually necessary to provide preventive care to

many patients, most of whom would not have suffered that illness anyway. Even

1 For additional information on both topics, see Congressional Budget Office, Key Issues in

Analyzing Major Health Insurance Proposals (December 2008), pp. 132–139.
Honorable Nathan Deal

Page 2

when the unit cost of a particular preventive service is low, costs can accumulate

quickly when a large number of patients are treated preventively. Judging the

overall effect on medical spending requires analysts to calculate not just the

savings from the relatively few individuals who would avoid more expensive

treatment later, but also the costs for the many who would make greater use of

preventive care.2 As a result, preventive care can have the largest benefits relative

to costs when it is targeted at people who are most likely to suffer from a

particular medical problem; however, such targeting can be difficult because

preventive services are generally provided to patients who have the potential to

contract a given disease but have not yet shown symptoms of having it.

Researchers who have examined the effects of preventive care generally find that

the added costs of widespread use of preventive services tend to exceed the

savings from averted illness. An article published last year in the New England

Journal of Medicine provides a good summary of the available evidence on how

preventive care affects costs.3 After reviewing hundreds of previous studies of

preventive care, the authors report that slightly fewer than 20 percent of the

services that were examined save money, while the rest add to costs. Providing a

specific example of the benefits and costs of preventive care, another recent study

conducted by researchers from the American Diabetes Association, the American

Heart Association, and the American Cancer Society estimated the effects of

achieving widespread use of several highly recommended preventive measures

aimed at cardiovascular disease—such as monitoring blood pressure levels for

diabetics and cholesterol levels for individuals at high risk of heart disease and

using medications to reduce those levels.4 The researchers found that those steps

would substantially reduce the projected number of heart attacks and strokes that

occurred but would also increase total spending on medical care because the

ultimate savings would offset only about 10 percent of the costs of the preventive

services, on average. Of particular note, that study sought to capture both the

costs and benefits of providing preventive care over a 30-year period.

Of course, just because a preventive service adds to total spending does not mean

that it is a bad investment. Experts have concluded that a large fraction of

preventive care adds to spending but should be deemed “cost-effective,” meaning

that it provides clinical benefits that justify those added costs: Roughly 60 percent

of the preventive services examined in the review cited above have additional

2 In the case of screening tests, additional spending may also arise from treatment of newly

diagnosed conditions as well as treatment stemming from tests yielding false positive results—that

is, results indicating that a disease is present even though it is not.

3 Joshua T. Cohen, Peter J. Neumann, and Milton C. Weinstein, “Does Preventive Care Save

Money? Health Economics and the Presidential Candidates,” New England Journal of Medicine,

vol. 358, no. 7 (February 14, 2008), pp. 661–663.

4 Richard Kahn and others, “The Impact of Prevention on Reducing the Burden of Cardiovascular

Disease,” Circulation, vol. 118 (July 28, 2008), pp. 576–585.
Honorable Nathan Deal

Page 3

costs that many in the health care community consider to be reasonable relative to

their clinical benefits. Still, providing that preventive care would represent a net

use of resources rather than a source of funding for other activities. (About

20 percent of the services reviewed have costs that are large relative to their

benefits, and a small fraction actually impair health while adding to costs.)

That pattern is not unique to preventive services. Treatments for existing medical

conditions range from those that save money to those that cost money in much the

same way that preventive services do: About 20 percent save money, and about

60 percent have costs that many consider reasonable relative to their benefits,

according to the study cited above. Thus, not only preventive services but medical

services more generally could be evaluated in order to encourage high-value

services of both types and discourage low-value ones. (Note that with respect to

both preventive care and treatments, the review encompassed only those

approaches that had been carefully studied, and not the whole spectrum of each

type of service.)

Even if the provision of preventive medical care saves money, potential savings

from expanded federal support might be limited depending on how frequently that

service is currently provided. Many studies of preventive care compare the costs

and benefits of a preventive service with the costs and benefits of doing nothing.

In practice, of course, a great deal of preventive medicine is already being

performed—examples include periodic screening for colon or breast cancer, the

use of cholesterol-lowering drugs that help prevent serious heart disease, and the

use of vaccines—and many insurance plans already cover certain preventive

services at little or no cost to enrollees.

Consequently, a new government policy to encourage prevention could end up

paying for preventive services that many individuals are already receiving—

which would add to federal costs but not reduce total future spending on health

care. In particular, Medicare already covers preventive services that have been

shown to reduce net costs. Moreover, legislation enacted last summer authorizes

Medicare to add coverage of preventive services that improve health, including

those that also reduce costs. For their part, private insurers are likely to be

motivated to cover services that are shown to reduce costs in the short run, so the

potential to increase the use of such services among privately insured individuals

is especially limited. However, the turnover that occurs as individuals change jobs

and switch insurers may discourage insurers from subsidizing preventive care that

takes a long time to pay off, because the initial insurers may not be the ones to

realize the resulting benefits.

A further consideration affecting the budgetary impact of proposals is that some

types of preventive care may increase longevity. Of course, that effect reinforces

the desirability of such care, but it also could add to federal spending in the long

run: Social Security outlays rise when people live longer, and Medicare outlays

may rise because, even if a preventive service lowers a beneficiary’s risk of one
Honorable Nathan Deal

Page 4

illness, a longer lifespan allows for more time to incur other health care expenses

associated with age.

In sum, expanded governmental support for preventive medical care would

probably improve people’s health but would not generally reduce total spending

on health care. However, government funding for some specific types of

preventive care might lower total spending. In its estimates, CBO seeks to capture

the likely future effects on the budget on a case-by-case basis.

Wellness Services

Wellness services include efforts to encourage healthy eating habits and exercise

and to discourage bad habits such as smoking. As with preventive care, CBO’s

estimates of the budgetary effects of expanded governmental support for wellness

services endeavor to account for any savings that would result from greater use of

those services as well as the costs of those services. However, evidence regarding

the effect of wellness services on subsequent spending on health care is limited,

and CBO is continuing to evaluate the evidence that does exist.

Where CBO has identified evidence about the effects on future medical spending

of broader government policies that encourage better health, the agency tries to

include those effects in its analysis. For example, CBO’s estimates of the

budgetary effects of reduced tobacco use (from a higher excise tax, for example)

include a reduction in Medicaid spending because less smoking would result in

fewer low-birthweight babies, who have higher costs at birth and afterward.

More generally, however, designing government policies that are effective at

inducing people to be healthier is challenging. Even successful efforts might take

many years to bear fruit and could involve significant costs. Moreover, many

employers already support some wellness services for their employees, and new

government efforts to encourage such services could end up paying for services

that some individuals are already receiving—which would add to federal costs but

not reduce total future spending on health care. As with preventive medicine, the

net budgetary effect of government support for wellness services depends on the

balance of two factors—the reduction in government spending for people who

reduce their future use of medical care and the costs to the government of

providing or subsidizing wellness services.

One notable success story in improving health is the large reduction in smoking

that has occurred in the United States over the past several decades: The fraction

of adults who smoke today is roughly half of what it was in 1965. But public

policies that discouraged smoking took decades to develop, implement, and reach

fruition. Obesity, which is perhaps the most pressing public health problem facing

the country, is probably even more difficult to address. Unlike smoking, which

involves a unique substance that is not healthy in any quantity, obesity is the end

result of several interacting factors that are not all intrinsically unhealthy. One of

those factors is obviously diet, which can be hard to regulate because many foods
Honorable Nathan Deal

Page 5

are safe to eat in moderation. Another key factor is lack of exercise, a bad habit

that—like a poor diet—can be difficult for individuals to change and is

particularly difficult for policymakers to influence. Approaches for losing weight

reflect those difficulties: A variety of interventions appear to succeed in the short

run, but relatively few participants are able to maintain their weight loss for a long

period of time. Keeping to a lower weight may require longer-lasting, and

potentially more expensive, approaches.

One recent study that analyzed the interactions of different chronic conditions and

the costs of treating them—but did not address the costs of avoiding the

conditions—found that cutting obesity rates in half would reduce total medical

spending by the elderly Medicare population by roughly 10 percent in 2030.5

However, the study also summarized other researchers’ findings that, although

better diets and increased physical activity lead to weight loss, “the majority of

patients regain the initial weight loss within two to five years, [so] attention has

thus focused on more intensive interventions to sustain weight loss.” Another

recent study estimated that the annual medical burden of obesity is now almost

10 percent of all medical spending and, specifically, that Medicare and Medicaid

spending would be about 10 percent lower in the absence of obesity.6 However,

the article also noted, “The extent to which greater use of obesity treatments

would reduce spending in either the short or the long run remains unknown. The

same is true for prevention. Many successful obesity prevention efforts are likely

to be cost-effective ... but not cost saving. From a public health perspective, ...

these interventions may still be worth pursuing.”

In an effort to improve health and reduce medical costs, many employers—

particularly large employers—offer their workers wellness programs designed to

encourage healthy living.7 Those programs include nutrition and weight loss

programs, discounts for gym membership, smoking cessation programs, and other

personal health coaching. Although some case studies suggest that certain

wellness programs reduce subsequent medical care, little systematic evidence

exists. The findings from case studies may not be applicable to programs that

would be implemented more broadly, either because the characteristics of the

affected people may be different or because employers’ adoption of wellness

programs has been combined sometimes with other changes in health insurance

(such as changes in payments to providers or changes in employees’ cost5 Dana P. Goldman and others, “The Value of Elderly Disease Prevention,” Forum for Health

Economics and Policy, vol. 9, no. 2 (2006), www.bepress.com/fhep/biomedical_research/1/.

6 Eric A. Finkelstein and others, “Annual Medical Spending Attributable to Obesity: Payer- and

Service-Specific Estimates,” Health Affairs, Web Exclusive (2009), pp. w822–w831.

7 Steven G. Aldana, “Financial Impact of a Comprehensive Multisite Workplace Health Promotion

Program,” Preventive Medicine, vol. 40 (2005), pp. 131–137.
Honorable Nathan Deal

Page 6

sharing).8 Identifying the effects of wellness services on health is especially

difficult because those effects may not emerge for years: According to a review of

the literature in 2001, studies of wellness activities generally follow participants

for a few years—long enough to change some risk factors but not usually long

enough to generate significant reductions in disease.9 Because the evidence about

such programs continues to evolve, CBO will continue to examine that evidence

closely in evaluating specific proposals—the effects of which could depend very

importantly on the proposals’ design.

Scorekeeping Rules and Procedures

Beyond the substantive factors that can limit the effect of expanded governmental

support for preventive medical care and wellness services on future government

spending on health care, budget “scorekeeping” rules specify that only certain

types of spending effects can be considered for purposes of Congressional budget

enforcement. Scorekeeping rules were set forth by the Congress in the conference

report for the Balanced Budget Act of 1997 and are updated occasionally upon

agreement by the full group of “scorekeepers,” a group that consists of the House

and Senate Committees on the Budget, the Congressional Budget Office, and the

Office of Management and Budget. The purpose of those rules is to ensure

consistent budgetary treatment across programs and over time.

Two particular scorekeeping rules could affect provisions that provide funding for

preventive care or wellness services. They prohibit counting any changes in

mandatory spending as a result of changes in the amount of mandatory funding

for administration or program management or in the amount of discretionary

appropriations for any activity. (A mandatory spending program is one that does

not require annual appropriations—for example, Medicare and Medicaid;

discretionary programs are funded each year in an appropriation bill—including,

for example, the research programs of the National Institutes of Health.) The rules

were adopted in part to avoid situations in which hoped-for, but quite uncertain,

savings are used to offset near-term, certain spending increases or revenue

decreases in the same legislation.

As a result, even when new prevention and wellness activities funded from

discretionary appropriations would, in CBO’s judgment, generate eventual

savings in Medicare or Medicaid, those savings would not be credited to the

appropriation action as part of the budget scorekeeping process. Some legislation

would authorize such appropriations, but not provide them, leaving that action for

future appropriation bills. Because such legislation would not actually provide

funding for prevention or wellness activities, it too could not be credited with

8 See, for example, Victoria Colliver, “Preventive Health Plan May Prevent Cost Increases,” San

Francisco Chronicle (February 11, 2007).

9 Steven G. Aldana, “Financial Impact of Health Promotion Programs: A Comprehensive Review

of the Literature,” American Journal of Health Promotion, vol. 15, no. 5 (May-June 2001),

pp. 296–320.
Honorable Nathan Deal

Page 7

savings in mandatory programs. However, once an appropriation bill becomes

law, any estimated savings in Medicare or Medicaid are factored into CBO’s

baseline projections; consequently, any realized savings in such cases will in fact

reduce budget deficits (unless they are used for other purposes).

I hope that you find this information useful. If you have any further questions,

please contact me or my staff. The CBO contacts are Jim Baumgardner and

Colin Baker.

Sincerely,

Douglas W. Elmendorf

Director

cc: Honorable Frank Pallone, Jr.

Chairman

Subcommittee on Health

Honorable Henry A. Waxman

Chairman

Committee on Energy and Commerce

Honorable Joe Barton

Ranking Member

Committee on Energy and Commerce
www.cbo.gov

CONGRESSIONAL BUDGET OFFICE Douglas W. Elmendorf, Director

U.S. Congress 

Washington, DC 20515 

November 25, 2009 

Honorable George Miller 

Chairman 

Committee on Education and Labor 

U.S. House of Representatives 

Washington, DC 20515 

Dear Mr. Chairman: 

In response to several questions that CBO has received, this letter provides additional 

information on the budgetary effects of proposals to establish the Community Living 

Assistance Services and Supports (CLASS) Program. 

H.R. 3962, the Affordable Health Care for America Act, as passed by the House of 

Representatives, and the Patient Protection and Affordable Care Act proposed by Senator 

Reid contain very similar proposals regarding a new federal program for long-term care 

insurance. Both proposals would establish a voluntary program for such insurance, 

termed the Community Living Assistance Services and Supports program. The key 

difference between the two proposals is in the population eligible to enroll: H.R. 3962 

would allow both active workers and nonworking spouses to enroll, while the Senate 

proposal would allow only active workers to participate. For both the House and Senate 

versions of CLASS, the Congressional Budget Office (CBO) estimates that the cash 

flows under the new program would generate budgetary savings (that is, a reduction in 

net federal outlays) for the 2010-2019 period and for the 10 years following 2019, 

followed by budgetary costs (an increase in net federal outlays) in subsequent decades.1

Because participation in the program would be voluntary, collections of insurance 

premiums under CLASS would be recorded as offsetting receipts (a credit against direct 

spending). 

On balance, CBO estimates that the version of CLASS specified in H.R. 3962 would 

reduce deficits by $102 billion over the 2010-2019 period, while the version contained in 

the Senate proposal would reduce deficits by $72 billion over that period. The following 

discussion provides additional information on CBO’s estimates for those proposals, 

including information on their longer-term effects. 

                                                           

1

 See Congressional Budget Office, cost estimate for H.R. 3962, the Affordable Health Care for America Act 

(November 20, 2009); and cost estimate for the Patient Protection and Affordable Care Act (November 18, 2009).
Honorable George Miller 

Page 2 

Description of the CLASS Proposals 

The Community Living Assistance Services and Supports proposals in H.R. 3962 and 

under consideration in the Senate would each establish a voluntary federal program for 

long-term care insurance that would be administered by the Secretary of Health and 

Human Services (HHS). Under both proposals, individuals could purchase coverage that 

would provide specified future benefits, with premiums set so that the program would be 

in actuarial balance over 75 years. (Actuarial balance means that expected insurance 

premiums plus the interest earned on such premium income would equal or exceed the 

expected cash payments for future benefits and the administrative costs of operating the 

program.) Premiums would vary only according to the enrollee’s age when he or she 

enters the program. Once enrolled, an individual’s premium would generally remain the 

same for as long as that individual remained in the program. H.R. 3962 would allow 

active workers and their nonworking spouses to enroll, while the Senate proposal would 

allow only active workers to participate. 

In general, enrollees would have to pay premiums for five years to be vested in the 

program (that is, eligible to receive benefits in the event they become functionally 

disabled). Vested enrollees who need assistance performing at least two or three common 

daily activities such as dressing, bathing, and eating would receive cash benefits to pay 

for support services in a community setting. Severely impaired enrollees could apply 

their benefit toward the cost of residential care in a nursing home facility. The benefit 

would be at least $50 per day (indexed for inflation); the Secretary of HHS would set 

benefit levels based on the extent of enrollees’ impairment. CBO assumed that the 

Secretary would initially establish an average daily benefit of about $75 (indexed for 

inflation). That figure includes an average benefit of $50 per day for impaired enrollees 

living in the community and larger amounts for enrollees who become institutionalized. 

Benefit payments made through the CLASS program would not be considered as income 

in determining an enrollee’s eligibility for Medicaid. 

Both the House and Senate legislation would provide considerable authority to the 

Secretary to adjust premiums for both current and future enrollees and to reduce benefits 

to the daily minimum of $50 in order to maintain the solvency of the program. 

Budgetary Effects Over the Next 10 Years 

CBO’s estimates of the CLASS provisions in H.R. 3962 and in the Senate proposal differ 

because of the treatment of nonworking spouses in the two proposals. CBO estimates that 

the inclusion of nonworking spouses in the House proposal would increase expected 

future benefit payments (and would increase premiums correspondingly) because 

nonworking spouses who enroll in the program would be expected to be less healthy, on 

average, than active workers, and therefore more likely to become functionally impaired 

in later years and qualify for benefits. 
Honorable George Miller 

Page 3 

H.R. 3962. CBO estimates that under the House-passed version of the CLASS program, 

the average monthly premium in 2011 would be about $146 (premiums for new enrollees 

would increase with inflation in later years). Expected enrollment in the program would 

reach slightly more than 10 million people by 2019 (or about 4 percent of the adult 

population). The estimated premiums are calculated to be adequate for the program to 

remain solvent for 75 years, taking into account the interest income that would be 

generated on unspent balances in the program’s trust fund. (Because most enrollees 

would not receive benefits for many years, the fund would accumulate significant 

balances in the early years of the program.) 

Over the 2010-2019 period, CBO estimates that the House-passed version of the CLASS 

program would reduce federal budget outlays by about $102 billion (see Table 1). This 

deficit reduction would occur in part because no benefits would be paid out during the 

first five years the program was in operation. Premium receipts would total about 

$123 billion over the 10–year period, and benefit payments would amount to $20 billion, 

CBO estimates. For those 10 years, administrative costs associated with operating the 

program would be 3 percent of premiums, as specified in the legislation, or about 

$4 billion. The program would generate about $2 billion in savings (over the 2010-2019 

period) in the Medicaid program because, once an individual became eligible to collect 

benefits under both the CLASS and Medicaid programs, a portion of the CLASS benefit 

would go toward offsetting Medicaid costs. Medicaid would continue to provide the full 

array of long-term care benefits—to the extent that the individual was eligible—but the 

CLASS program would defray some costs that Medicaid would have otherwise paid. 

Table 1. Estimated Budgetary Impact of Section 2581 of H.R. 3962, the Affordable Health Care for 

America Act 

 Outlays in Billions of Dollars, by Fiscal Year 

 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

 

Premiums 0 -5.3 -9.3 -12.6 -14.4 -16.2 -16.0 -16.2 -16.4 -16.5 -41.7 -123.1

Benefit Payments 0 0 0 0 0 0 2.3 4.3 6.1 7.3 0 20.0

Administrative Costs 0 0.2 0.3 0.4 0.4 0.5 0.5 0.5 0.5 0.5 1.3 3.7

Medicaid Savings 0 0 0 0 0 0 -0.3 -0.5 -0.7 -0.8 0 -2.2

Net Outlays 0 -5.2 -9.0 -12.3 -14.0 -15.8 -13.5 -11.9 -10.4 -9.5 -40.5 -101.6
Honorable George Miller 

Page 4 

The Senate Proposal. CBO estimates that under the current Senate proposal for CLASS, 

the average monthly premium in 2011 would be about $123 (premiums for new enrollees 

would increase with inflation in later years), and enrollment in the program would be 

slightly less than 10 million people by 2019 (or about 3.5 percent of the adult 

population). The slightly lower enrollment expected under the Senate proposal stems 

from the exclusion of nonworking spouses (as would be allowed under H.R. 3962). 

However, a higher percentage of those eligible would be expected to enroll under the 

Senate proposal because of the lower estimated premium. 

Over the 2010-2019 period, CBO estimates that the Senate version of CLASS would 

reduce federal outlays by about $72 billion (see Table 2). Premium receipts would total 

about $88 billion over the 10–year period, and benefit payments would amount to about 

$14 billion, CBO estimates. For that period, administrative costs associated with 

operating the program would be 3 percent of premiums, as specified in the legislation, or 

less than $3 billion. The program would generate almost $2 billion in savings in the 

Medicaid program over the next 10 years. 

Table 2. Estimated Budgetary Impact of Section 8001 of the Patient Protection and Affordable 

Care Act 

 Outlays in Billions of Dollars, by Fiscal Year 

 

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

2010-

2014

2010-

2019

 

Premiums 0 -3.8 -6.6 -9.0 -10.2 -11.5 -11.4 -11.6 -11.7 -11.8 -29.6 -87.6

Benefit Payments 0 0 0 0 0 0 1.6 3.0 4.3 5.2 0 14.1

Administrative Costs 0 0.1 0.2 0.3 0.3 0.3 0.3 0.3 0.4 0.4 0.9 2.6

Medicaid Savings 0 0 0 0 0 0 -0.2 -0.3 -0.5 -0.6 0 -1.6

Net Outlays 0 -3.7 -6.4 -8.7 -9.9 -11.2 -9.6 -8.6 -7.5 -6.8 -28.7 -72.5

Effects Beyond the First 10 Years 

Projections of premium receipts and benefit payments beyond the 10-year budget 

window (2010-2019) are subject to more uncertainty than projections for the first 

10 years, and detailed year-by-year projections of those amounts would not be 

meaningful. Among other factors, a wide range of changes could occur—in people’s 

health and disability status, in the evolution of private long-term care insurance, and in 

the delivery of medicine—that are likely to be significant but are very difficult to predict, 

both under current law and under the House and Senate proposals. As a result, CBO is 

only able to give a broad assessment of the potential budgetary outcomes in future 

decades, based on the underlying structure of the long-term care proposals. 
Honorable George Miller 

Page 5 

CBO estimates that both the House and Senate versions of the CLASS program would 

reduce the federal budget deficit in the second decade following enactment of the 

legislation (2020-2029), but by smaller amounts than in the initial decade. By the third 

decade, the sum of benefit payments and administrative costs would probably exceed 

premium income and savings to the Medicaid program. Therefore, the programs would 

add to budget deficits in the third decade—and in succeeding decades—by amounts on 

the order of tens of billions of dollars for each 10-year period. The House-passed version 

of CLASS, which would reduce the federal budget deficit in the first 10 years by an 

estimated $30 billion more than would the Senate version, would likewise add somewhat 

more to the deficits in the third decade and beyond than would the Senate proposal. (That 

is, the greater participation and poorer health status of enrollees under the House version 

would lead to larger benefit payments in those later years.) 

The CLASS program would add to budget deficits in future decades even though the 

proposals require the Secretary of HHS to set premiums to ensure the program’s solvency 

for 75 years. Because of the extended time horizon involved in long-term care insurance 

and the build-up of unspent premium receipts, income from interest on accumulated fund 

balances would play a large role in financing the program’s benefits. Typically, enrollees 

pay premiums for many years before some of them become disabled and qualify for 

benefits. Private issuers of long-term care insurance finance benefit payments from their 

reserve of accumulated premium receipts and the income they derive from investing 

those premiums. Similarly, the Secretary would invest CLASS program premium receipts 

in federal securities and would incorporate that expected income into calculations of 

appropriate premiums to charge. However, trust fund income from investments in federal 

securities would be an intragovernmental transfer within the federal budget. As a result, 

from a budget scorekeeping perspective, the CLASS program would inevitably add to 

future deficits (on a cash basis) by more than it reduces deficits in the near term, even 

though the premiums would be set to ensure solvency of the program.2

Key Caveats. These estimated effects of the CLASS proposals are subject to 

considerable uncertainty, for several reasons. The budgetary impact would depend 

importantly on the number of people who would enroll in the program and the health 

status of those enrollees later in life. That would depend, in turn, on peoples’ perceptions 

about their need for long-term care insurance and their comparison of the premiums they 

would have to pay in the CLASS program with the value of the future benefits the 

program would provide. CBO’s estimate of the premiums that would be required to 

ensure the programs’ actuarial soundness over 75 years is based on projections of future 

trends in the prevalence of disabilities and in the ways that care for people with 

disabilities will be provided. Though some insight can be obtained from the experience of 

                                                           

2 Because premium income in the early years would reduce the amount that the government has to borrow from the 

public, interest on the public debt would also be reduced during that period, but that type of effect is not included in 

the estimates used in the Congressional budget process.
Honorable George Miller 

Page 6 

private-market insurance, both of those trends are subject to substantial uncertainty. 

Moreover, under the CLASS proposals, the Secretary of HHS would be given great 

latitude in administering the program, which adds to the uncertainty about the program’s 

cash flows because benefit and premium levels could be set at different levels than CBO 

has estimated and could be adjusted over time in a variety of ways. 

The CLASS program could be subject to considerable financial risk in the future if it 

were unable to attract a sufficiently healthy group of enrollees. Relatively healthy 

enrollees would ensure that the program’s premiums and the interest on those premiums 

would be adequate to pay for future benefits. However, attracting healthy enrollees could 

be challenging for several reasons. One reason is that the administrative costs of the 

program are limited to 3 percent of premiums, which might mean that the Secretary 

would not have sufficient funds to effectively market the program to a large number of 

people. A relatively small enrollment would increase the risk of adverse selection and 

could undermine the long-run stability of the program. (On the other hand, by keeping 

administrative costs to a minimum, the CLASS program might attract relatively healthy 

enrollees because the resulting premiums could be lower than the premiums that would 

be charged for many private policies that have substantially higher administrative costs 

and devote a share of their premiums to profit.) 

Another reason why attracting health enrollees could be a challenge is that the CLASS 

program would have to enroll all eligible people who apply, making it likely that some 

enrollees would be people who were unable to obtain coverage in the private market 

because of their poor health status. To avoid insuring people with a higher-than-average 

probability of eventually receiving benefits, private insurers employ extensive 

underwriting of policies sold in the individual market (that is, people are charged 

different premiums depending on their expected future need for care), and market 

coverage selectively in the employer market. 

The program includes provisions that would allow employers, at their option, to 

automatically enroll employees in the CLASS program. That feature could help to boost 

participation in the program and thereby mitigate the risk of adverse selection. However, 

the proposals would not require employers to auto-enroll their employees, and employees 

would have the right to opt out of the coverage altogether, reducing the likely effects of 

auto-enrollment to stimulate participation in the program. 
Honorable George Miller 

Page 7 

I hope you find this information helpful. If you have any questions, please contact me. 

The CBO staff contacts are Bruce Vavrichek and Stuart Hagen. 

 Sincerely, 

 Douglas W. Elmendorf 

 Director 

cc: Honorable John Kline 

 Senior Republican 

 Honorable Henry A. Waxman 

 Chairman 

 Committee on Energy and Commerce 

 Honorable Joe Barton 

 Ranking Member 

 Honorable Charles B. Rangel 

 Chairman 

 Committee on Ways and Means 

 Honorable Dave Camp 

 Ranking Member 

 Honorable John D. Dingell 

Identical letter sent to the Honorable Tom Harkin.