PATIENT 

PROTECTION AND 

AFFORDABLE CARE 

ACT 

Effect on Long-Term 

Federal Budget 

Outlook Largely 

Depends on Whether 

Cost Containment 

Sustained 

Report to the Ranking Member, 

Committee on the Budget, U.S. Senate 

January 2013 

GAO-13-281 

United States Government Accountability Office

GAO 
United States Government Accountability Office

Highlights of GAO-13-281, a report to the 

Ranking Member, Committee on the Budget, 

U.S. Senate

January 2013

PATIENT PROTECTION AND AFFORDABLE 

CARE ACT

Effect on Long-Term Federal Budget Outlook 

Largely Depends on Whether Cost Containment 

Sustained 

Why GAO Did This Study

GAO regularly prepares long-term 

federal budget simulations under 

different assumptions about broad 

fiscal policy decisions. GAO’s Baseline 

Extended simulation illustrates the 

long-term outlook assuming current 

law at the time the simulation was run 

is generally continued, while the 

Alternative simulation illustrates the 

long-term outlook assuming historical 

trends and past policy preferences

continue. Under either set of 

assumptions, these simulations show 

that the federal budget is on an 

unsustainable fiscal path driven on the 

spending side by rising health care 

costs and the aging of the population. 

PPACA provides for expanded 

eligibility for Medicaid and federal 

subsidies to help individuals obtain 

private health insurance and includes 

provisions designed to slow the growth 

of federal health care spending.

GAO was asked to describe the longterm effects of PPACA on the federal 

fiscal outlook under both its Baseline 

Extended and Alternative simulations; 

how changes in assumptions for 

federal health care cost growth might 

affect the outlook; and the key drivers 

of health care cost growth and how the 

uncertainty associated with each may 

influence future health care spending. 

To do this, GAO compared the results 

of its long-term fiscal simulations from

before and after the enactment of 

PPACA and examined the key factors 

that contributed to changes in revenue 

and spending components; reviewed 

trends in health care cost growth and 

performed a sensitivity analysis varying 

rates of excess cost growth; and 

reviewed literature describing key 

drivers of health care cost growth and 

areas of uncertainty related to 

projections of federal health care costs.

What GAO Found

The effect of the Patient Protection and Affordable Care Act (PPACA), enacted in 

March 2010, on the long-term fiscal outlook depends largely on whether 

elements in PPACA designed to control cost growth are sustained. As shown in 

the figure below, there was notable improvement in the longer-term outlook after 

the enactment of PPACA under GAO’s Fall 2010 Baseline Extended simulation, 

which assumes both the expansion of health care coverage and the full 

implementation and effectiveness of the cost-containment provisions over the 

entire 75-year simulation period. However, the federal budget remains on an 

unsustainable path. Further, questions about the implementation and

sustainability of these provisions have been raised by the Centers for Medicare & 

Medicaid Services’ Office of the Actuary and others, due in part to challenges in 

sustaining increased health care productivity. The Fall 2010 Alternative 

simulation assumed cost containment mechanisms specified in PPACA were 

phased out over time while the additional costs associated with expanding

federal health care coverage remained. Under these assumptions, the long-term 

outlook worsened slightly compared to the pre-PPACA January 2010 simulation. 

Comparison of Debt Held by the Public in GAO’s January 2010 and Fall 2010 

Simulations 

Federal health care spending is expected to continue growing faster than the 

economy. In the near term, this is driven by increasing enrollment in federal 

health care programs due to the aging of the population and expanded eligibility.

Over the longer term, excess cost growth (the extent to which growth of health 

care spending per capita exceeds growth of income per capita) is a key driver. 

Slowing the rate of health care cost growth would help put the budget on a more 

sustainable path. There is general agreement that technological advancement

has been the key factor in health care cost growth in the past, along with the 

effects of expanding health insurance coverage and increasing income, but there 

is considerable uncertainty about the magnitude of the impact that the different 

factors will have on future health care cost growth.

View GAO-13-281. For more information, 

contact Susan J. Irving at (202) 512-6806 or 

irvings@gao.gov, or James C. Cosgrove at 

(202) 512-7114 or cosgrovej@gao.gov 
Page i GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Letter 1 

Background 4

Effect of PPACA on the Long-Term Fiscal Outlook Depends on 

Whether Cost-Containment Mechanisms are Sustained 10

Health Care Spending in Our Long-Term Simulations Largely 

Depends on Assumptions about Enrollment and Excess Cost 

Growth 19

Technological Change Has Been the Largest Driver of Health Care 

Cost Growth, and with Health Insurance Coverage and 

Increasing Income, is Likely the Largest Source of Uncertainty 

for Health Care Cost Projections 28

Concluding Observations 40

Appendix I Key Assumptions and Technical Changes in Our Federal 

Simulations for this Report 43

Appendix II Changes in the Long-Term Fiscal Outlook since 2010 49

Appendix III GAO Contacts and Staff Acknowledgments 53

Tables

Table 1: Key Budget Assumptions Underlying the Baseline 

Extended Simulations 46

Table 2: Key Budget Assumptions Underlying the Alternative 

Simulations 47

Table 3: Key Economic Assumptions Underlying the Long-Term 

Federal Simulations 48

Table 4: Key Budget Assumptions Underlying the Fall 2012 

Simulations 51

Table 5: Key Economic Assumptions Underlying the Fall 2012 

Long-Term Simulations 52

Contents 
Page ii GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Figures

Figure 1: Comparison of Debt Held by the Public in January 2010 

and Fall 2010 Simulations 12

Figure 2: Comparison of Spending on Major Federal Health Care 

Programs in the January 2010 and Fall 2010 Baseline 

Extended Simulations for Select Years 13

Figure 3: Comparison of Spending on Major Federal Health Care 

Programs in the January 2010 and Fall 2010 Alternative 

Simulations for Select Years 16

Figure 4: Changes in Noninterest Spending, Revenue, and the 

Primary Deficit in the Baseline Extended Simulation 18

Figure 5: Changes in Noninterest Spending, Revenue, and the 

Primary Deficit in the Alternative Simulation 19

Figure 6: Daily Average Number of People Turning 65 21

Figure 7: Federal Health Care Spending under Different Excess 

Cost Growth Scenarios 26

Figure 8: Debt Held by the Public in the Baseline Extended and 

Alternative Simulations with Different Assumptions for 

Excess Cost Growth 27

Figure 9: Estimates of the Percentage of Past Real Health Care 

Cost Growth Per Capita Explained by Different Factors 30

Figure 10: Comparison of Debt Held by the Public in Our January 

2010, Fall 2010, and Fall 2012 Simulations 49
Page iii GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Abbreviations

CBO Congressional Budget Office

CHIP Children’s Health Insurance Program

CMS Centers for Medicare & Medicaid Services 

FPL federal poverty level

GDP gross domestic product

OACT Office of the Actuary 

PPACA Patient Protection and Affordable Care Act

Trustees Social Security and Medicare Trustees

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

necessary if you wish to reproduce this material separately.
Page 1 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

United States Government Accountability Office

Washington, DC 20548

January 31, 2013

The Honorable Jeff Sessions

Ranking Member

Committee on the Budget

United States Senate

Dear Senator Sessions:

Our long-term federal budget simulations have shown federal debt as a 

share of gross domestic product (GDP) continuously increasing over the 

long term, which indicates that the budget is on an unsustainable path. 

The specific timing of the debt buildup, however, depends on the 

assumptions used. We run two simulations based on different 

assumptions about broad fiscal policy options. Our Baseline Extended 

simulation illustrates the long-term outlook assuming federal laws 

(applicable at the time the simulation was run) remain unchanged, while 

our Alternative simulation illustrates the long-term fiscal outlook assuming 

historical trends and policy preferences continue.1

Our fiscal simulations and projections by the Congressional Budget Office 

(CBO) and others have shown that the key drivers of the federal 

government’s long-term fiscal imbalance on the spending side are rising 

health care costs and the aging of the population. Although health care 

spending growth recently slowed, spending on federal health care 

programs, including Medicare and Medicaid,2

 

1

For our most recent update, see The Federal Government’s Long-Term Fiscal Outlook: 

Fall 2012 Update, 

is expected to continue 

growing faster than the overall economy as more members of the babyboom generation become eligible for these federal health benefits and the 

cost of caring for each enrollee increases. The number of baby boomers 

turning 65 is projected to grow from an average of about 7,600 per day in 

2011 to more than 11,000 per day in 2029.

GAO-13-148SP (Washington, D.C.: Dec. 3, 2012). 

2

Medicare is a federal health care program for the aged and disabled. Medicaid is a jointly 

funded federal-state health care program for certain categories of low-income individuals. 
Page 2 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

In March 2010, the Patient Protection and Affordable Care Act (PPACA) 

was enacted,3

Given the importance of health care spending for the federal 

government’s long-term finances, you asked that we examine the longterm effects of the new, major changes to coverage included in PPACA 

on the federal budget under both our Baseline Extended and Alternative 

simulations. This report describes: (1) how the results of our long-term 

fiscal simulations changed between those run before the enactment of 

PPACA and after its enactment and the key factors that contributed to 

changes in revenue and spending components, including major federal 

health care programs,

which makes substantial changes to Medicare and 

Medicaid as well as other components of the federal budget that will have 

significant implications for the federal government’s fiscal outlook in both 

the near and long term. For example, PPACA provides for the expansion 

of eligibility in the Medicaid program and federal subsidies to help 

individuals obtain private insurance coverage; it also includes provisions 

designed to slow the growth of federal health care spending, particularly 

for the Medicare program. There are, however, significant uncertainties 

surrounding the effects of PPACA on health care spending and other 

factors that influence future health care costs more generally, including 

how the development and deployment of medical technology, future 

policy decisions, and cost and availability of insurance affect growth in 

health care spending per capita.

4

To describe how our federal budget simulations changed since the 

enactment of PPACA, we compared the results from our Baseline 

(2) how changes in assumptions for federal health 

care cost growth might affect the federal government’s long-term fiscal 

outlook, and (3) the key drivers of health care cost growth and how the 

uncertainty associated with each may influence future health care 

spending estimates.

 

3

Pub. L. No. 111-148, 124 Stat. 119 (Mar. 23, 2010), as amended by the Health Care and 

Education Reconciliation Act of 2010, Pub. L. No. 111-152, 124 Stat. 1029 (Mar. 30, 

2010). In this report, references to “PPACA” include amendments made by the Health 

Care and Education Reconciliation Act.

4

For purposes of this report, major federal health care programs are defined as Medicare, 

Medicaid, and the subsidies available to assist individuals to purchase insurance coverage

through the American Health Benefit Exchanges. Federal spending on the Children’s 

Health Insurance Program is also included but is considerably lower than these other 

health care programs. 
Page 3 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Extended and Alternative simulations in the January 2010 Update

(released in March 2010 just before PPACA was enacted) to those in the 

Fall 2010 Update (released in November 2010 shortly after the law was 

enacted).5

 We also compared the results to those in the Fall 2012 Update 

(released in December 2012), which incorporated both the estimates 

revised following the U.S. Supreme Court’s June 2012 decision regarding 

the expansion of Medicaid to newly eligible populations and the Social 

Security and Medicare Trustees (Trustees) and the Centers for Medicare 

& Medicaid Services’ (CMS) Office of the Actuary’s (OACT) more recent 

estimates for Medicare spending.6

 While we describe changes to federal 

health care spending when relevant to PPACA, we focus on the changes 

between our January 2010 and Fall 2010 simulations, since this 

minimizes the effects of other legislative or technical changes unrelated to 

PPACA on our long-term simulations and can provide a general estimate 

of the act’s effects on the long-term fiscal outlook. We compared paths for 

the major federal health care programs identified previously as well as 

revenue and Social Security, other mandatory, discretionary, and net 

interest spending. Because of the aggregate nature of projections used in 

our simulations, we cannot completely isolate or quantify either the effects 

of PPACA or of specific provisions of the act on the long-term outlook. We 

reviewed the underlying data and assumptions from CBO, the Trustees, 

and OACT used in our simulations to understand the reasons for any 

differences.7

 

5

GAO, The Federal Government’s Long-Term Fiscal Outlook: January 2010 Update, 

GAO-10-468SP (Washington, D.C.: Mar. 2, 2010) and The Federal Government’s LongTerm Fiscal Outlook: Fall 2010 Update, GAO-11-201SP (Washington, D.C.: Nov.15, 

2010). 

To assess the reliability of the data from CBO, the Trustees, 

and OACT used to develop these simulations, we examined whether the 

methodology used to create these projections is clear and transparent 

and whether the data are reasonable given the description of the 

methodology. We also examined whether the data were presented 

consistently in reports and supplementary data and, when possible, were 

consistent with others' reporting of similar data. We determined that the 

data were sufficiently reliable for our purposes of illustrating the potential 

fiscal outcomes under broad sets of different policy assumptions. 

6

For the results of our Fall 2012 simulations, see GAO-13-148SP. 

7

To better isolate the effects of changes made to CBO and OACT projections rather than 

technical changes to our own model, we also adjusted our January 2010 and Fall 2010 

simulations so that the same methods are followed for all simulations. Therefore, the 

results of our simulations in this report differ slightly from those published in 2010. See 

appendix I for the assumptions used in simulations in this report and description of the 

technical changes that were made. 
Page 4 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

To describe how changes in assumptions for federal health care cost 

growth might affect the federal government’s long-term fiscal outlook, we 

examined the effect of two key assumptions on federal health care 

spending: (1) enrollment in the major federal health care programs and 

(2) excess cost growth—or the extent to which health care spending per 

capita grows faster than the GDP per capita. We performed a sensitivity 

analysis by varying assumptions for the rate of excess cost growth in our 

simulations. We did not analyze what particular changes to federal health 

care policies would produce specific rates of excess cost growth.

To identify the key drivers of health care cost growth and how the 

uncertainty associated with each may influence future health care 

spending estimates, we reviewed literature on key factors affecting health 

care costs, described how uncertainty associated with each factor may 

influence health care spending, and when possible, broadly outlined a 

range of potential outcomes associated with the uncertainty of each 

factor. We did not independently assess the validity of estimates of 

uncertainty discussed in the literature. The extent to which we could 

quantify the range of possible health care cost growth estimates resulting 

from this uncertainty was limited by the availability of existing studies.

We conducted our work from July 2012 to January 2013 in accordance 

with all sections of GAO’s Quality Assurance Framework that are relevant 

to our objectives. The framework requires that we plan and perform the 

engagement to obtain sufficient and appropriate evidence to meet our 

stated objectives and to discuss any limitations in our work. We believe 

that the information and data obtained, and the analysis conducted, 

provide a reasonable basis for any findings and conclusions in this report.

PPACA provided for additional health care coverage options for millions 

of lower income individuals through the expansion of eligibility for the 

Medicaid program and the creation of health insurance exchanges where 

eligible individuals can qualify for federal subsidies to purchase private 

health insurance coverage.8

 

8

There are other PPACA provisions that affect coverage such as the requirement that 

most uninsured U.S. citizens or legal residents obtain health insurance beginning in 

January 2014. In this report, however, we focus on changes in federal spending resulting 

from PPACA, including the availability of federal subsidies for individuals to purchase 

health insurance coverage, shown in the federal budget as an outlay. 

Background 
Page 5 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

• Medicaid. Medicaid is a joint federal-state program that provides 

health care coverage for certain low-income individuals. Under federal 

law, states historically have been required to cover certain categories 

of individuals under Medicaid (mandatory populations) with the 

flexibility to extend coverage to other defined groups (optional 

populations). PPACA provides for states to expand Medicaid 

coverage to most nonpregnant, nonelderly individuals with income 

that does not exceed 133 percent of the federal poverty level (FPL) 

beginning no later than January 1, 2014.9 The federal government will 

pay the full cost of covering newly eligible enrollees until 2017 at 

which point the federal share will begin to gradually decline to 90 

percent by 2020.10

• American Health Benefit Exchanges. These are marketplaces to be 

established by January 2014 to facilitate the purchase of private 

insurance coverage. Individuals obtaining insurance through the 

exchanges may qualify for federal subsidies (hereafter referred to as 

exchange subsidies) in the form of premium tax credits and cost 

sharing reductions. In order to qualify for the premium tax credit, 

individuals or families must meet certain criteria including income 

levels between 100 and 400 percent of the FPL and failing to qualify 

for other health care coverage, such as Medicare or Medicaid, or 

having access to affordable insurance of minimum value from an 

employer. The premium tax credit is refundable meaning that it can 

provide benefits to lower-income tax filers with little or no tax liability.11

 

9

PPACA also provides for a 5 percent income disregard when calculating modified 

adjusted gross income for determining Medicaid eligibility, which effectively increases this 

income level to 138 percent of the FPL. FPL refers to federal poverty guidelines issued by 

the Department of Health and Human Services each year in the Federal Register. These 

guidelines provide income thresholds that vary by family size and for certain states, and 

are updated using the Consumer Price Index. The FPL was $30,700 for a family of four in 

2012.

10Under PPACA, as enacted, states were required to cover this expansion population as a 

mandatory population. A failure by a state to cover mandatory populations may result in a 

termination of federal Medicaid matching funds for the entire program. However, the U.S. 

Supreme Court subsequently ruled that states that choose not to expand Medicaid 

eligibility to these newly eligible individuals are not subject to this potential penalty and 

instead will forgo only the enhanced federal matching funds associated with covering this 

population. See National Federation of Independent Business, et al., vs. Sebelius, Sec. of 

Health and Human Services, et al., 132 S.Ct. 2566 (U.S., June 28, 2012). 

11The portion of the tax credit that reduces an individual’s tax liability is categorized as a 

reduction in federal revenues and the portion of credits that exceed an individual’s tax 

liability is categorized as an increase in outlays. 
Page 6 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Individuals who enroll in an exchange plan may also be eligible for 

additional cost-sharing subsidies that further reduce the out-of-pocket 

amount they would otherwise have to pay when accessing covered 

health services.

While these changes, along with other PPACA provisions, are expected 

to increase federal health care spending, PPACA also included a number 

of provisions that aim to reduce the level of federal health care spending. 

For example, PPACA reduced payments both Medicare and Medicaid 

make to hospitals that serve a disproportionate share of low-income 

patients. This change reflects the expectation that PPACA’s major 

coverage expansions will result in significantly fewer uninsured hospital 

patients. Also, PPACA reduced estimated Medicare spending through 

changes to rates paid to Medicare Advantage organizations—Medicare’s 

private plan alternative to the original Medicare fee-for-service—to align 

Medicare Advantage payment rates more closely with spending on 

Medicare’s fee-for-service program.12

In addition, PPACA created a number of cost containment mechanisms 

designed to slow future growth of health care spending, such as:

• Productivity adjustments. PPACA seeks to restrain health spending 

growth by reducing the payment updates for many Medicare services 

for productivity gains.13

• Independent Payment Advisory Board (IPAB). PPACA called for the 

creation of a 15-member board to make recommendations, with 

certain restrictions, for reducing the costs of Medicare when per capita 

 This is intended to provide a strong financial 

incentive for health providers to enhance productivity, improve 

efficiency, or otherwise reduce their costs per service.

 

12In March 2010, CBO projected that these changes would reduce Medicare payments to 

Medicare Advantage plans by $136 billion from fiscal years 2010 to 2019. See CBO, H.R. 

4872, Reconciliation Act of 2010 (Final Health Care Legislation), March 20, 2010 (based 

on Medicare Advantage provisions in a combination of prior versions of PPACA and the 

Health Care and Education Reconciliation Act of 2010).

13Many Medicare provider categories that are reimbursed on a fee-for-service basis 

receive annual payment increases based on the Consumer Price Index or based on 

market basket updates, which measure the increase in prices that each provider category 

must pay for the goods and services in order to serve patients. PPACA required that 

payment updates for these provider categories be reduced by a productivity adjustment, 

defined as a 10-year average of changes in annual economy-wide private productivity. 
Page 7 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Medicare growth exceeds specified targets beginning in 2015. These 

recommendations are automatically implemented unless overridden 

by lawmakers.14

PPACA also incorporated certain tax provisions designed to generate 

revenue. Beginning in January 2013, PPACA imposed an additional 

Medicare Hospital Insurance tax on wages, compensation, and selfemployment income in excess of threshold amounts, defined as $200,000 

for individuals, $250,000 for spouses filing jointly, and $125,000 for 

spouses filing separate returns. PPACA also imposes an excise tax on 

high cost employer-sponsored health plans beginning in 2018. Employersponsored plans with a benefit value exceeding specified thresholds will 

generally be subject to a 40 percent excise tax.15 The excise tax will be 

levied on insurers but is expected eventually to be passed on to their 

customers. CBO, OACT, and other observers expect that the excise tax 

will create an incentive for employers to reduce the scope of their health 

benefits and, therefore, the demand for health care services.

The Trustees report annually to Congress on the financial operations and 

actuarial status of Medicare.16 The Trustees first incorporated the effects 

of PPACA on Medicare finances in their annual report released in August 

2010.17

 

14Beginning in 2013, the Chief Actuary of CMS will determine the projected per capita 

growth rate for Medicare for a multi-year period ending in the implementation year. If the 

projection exceeds a targeted growth rate, the IPAB will submit a proposal to reduce 

Medicare spending for the implementation year. If the board fails to submit a proposal, the 

Department of Health and Human Services must submit a proposal which will be 

implemented unless Congress takes action to override it. 

Similarly, CBO incorporated the estimated budgetary effects of 

the law in its 10-year current law baseline projections released in August 

2010 and its 75-year long-term budget projections released in June 

15These threshold levels are generally $10,200 for individuals and $27,500 for families in 

2018, adjusted in 2019 by growth in the Consumer Price Index plus 1 percentage point 

and by growth in the Consumer Price Index thereafter. 

16OACT prepares the report under the direction of the Trustees.

17Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary 

Medical Insurance Trust Funds, The 2010 Annual Report of the Boards of Trustees of the 

Federal Hospital Insurance and Federal Supplementary Medical Insurance Trust Funds, 

(Washington, D.C.: Aug. 5, 2010). 

Projections of the Effects 

of PPACA
Page 8 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

2010.18 In these reports, the Trustees, CBO, and OACT all expressed 

concerns about whether certain cost-containment mechanisms included 

in PPACA can be sustained over the long term. CBO and OACT both 

produced alternative projections that assume certain cost-containment 

mechanisms are not fully maintained over the long term.

19

We first incorporated the Trustees’, CBO’s, and OACT’s projections of the 

effects of PPACA on federal health care spending in our Fall 2010 update 

of the long-term fiscal outlook. The effects of PPACA are primarily seen 

through changes to assumptions for the following health care programs:

• Medicare. Medicare spending in our Baseline Extended simulation 

follows CBO’s baseline projections for the first 10 years, which follow 

current law and assume that reductions in Medicare physician 

payment rates unrelated to PPACA occur as scheduled; thereafter, 

Medicare spending is based on the Trustees’ intermediate 

projections.20

 

18CBO, The Long-Term Budget Outlook [Washington, D.C.: June 2010 (revised August 

2010)] and The Budget and Economic Outlook: An Update (Washington, D.C.: August 

2010).

Beginning in our Fall 2010 update, we assumed that 

certain cost-containment mechanisms intended to slow the growth of 

health care cost enacted in PPACA were sustained over the long 

term. In the Alternative simulation, Medicare spending is based on 

OACT’s alternative scenario, which assumes that reductions in 

Medicare physician rates do not occur as scheduled under current law 

and, starting in our Fall 2010 update, that certain cost-containment 

19In its June 2010 Alternative scenario, CBO assumed that certain cost-containment 

mechanisms were not in effect after 2020. See CBO, The Long-Term Budget Outlook

[Washington, D.C.: June 2010 (revised August 2010)]. In its August 2010 alternative 

projections, OACT assumed that productivity adjustments would be phased out over a 15-

year period beginning in 2020. See OACT, Projected Medicare Expenditures under an 

Illustrative Scenario with Alternative Payment Updates to Medicare Providers

(Washington, D.C.: Aug. 5, 2010).

20In addition to the cost-containment mechanisms enacted in PPACA, Medicare spending 

is also affected by separate assumptions about Medicare physician payment updates. 

Since 1998, Medicare payment rates for physician services have been determined by the 

Sustainable Growth Rate system, which establishes spending targets to limit growth in 

spending on physician services to roughly the overall rate of economic growth. Under 

current law, if actual spending exceeds the target level, then future physician payment 

updates are reduced. Since 2003, Congress has taken a series of legislative actions to 

override scheduled reductions in physician payment rates that would otherwise occur 

under law. Physician fee updates set by Congress have averaged 0.9 percent per year 

over this period.
Page 9 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

mechanisms enacted in PPACA intended to slow the growth of health 

care cost begin to phase out after 2019. Our Fall 2010 simulations 

also reflect changes in the level of Medicare spending resulting from 

other provisions of PPACA, such as reductions to payment rates for 

Medicare Advantage organizations.

• Medicaid, Children’s Health Insurance Program (CHIP), and 

exchange subsidies. In both the January 2010 and Fall 2010 Baseline 

Extended simulations, spending for Medicaid and exchange subsidies 

follows CBO’s baseline projections for the first 10 years and is then 

based on growth in spending for these programs consistent with 

CBO’s long-term assumptions for the number and age composition of 

enrollees and the Medicare Trustees’ intermediate assumptions for 

excess cost growth.21 Prior to Fall 2010, federal spending for CHIP 

was included in our simulations under other mandatory spending. 

Starting in Fall 2010, consistent with CBO, we include federal 

spending for CHIP along with subsidies for the newly created health 

insurance exchanges in a single category with Medicaid.22 Our Fall 

2010 Alternative simulation assumes that provisions in current law 

designed to limit the growth in spending on exchange subsidies are 

not maintained over the long term.23

Several provisions of PPACA affected federal revenue, including an 

excise tax on high cost employer-sponsored health plans and increase in 

the Medicare Hospital Insurance tax for higher income individuals and 

families. While the effects of these provisions are incorporated into our 

 

21Only the refundable portion of premium tax credit subsidies shown in the federal budget 

as an outlay is captured in these estimates. Premium tax credits also reduce the amount 

of federal revenue collected. CBO projects this to be much smaller than the increase in 

outlays for the refundable portion of the subsidies. Consistent with our past practice, we 

did not make specific assumptions about the composition of revenue over the long term in 

our simulations. 

22In January 2010, CBO projected that spending on CHIP would total $6 billion, or 0.03 

percent of GDP, in 2020. See CBO, The Budget and Economic Outlook: Fiscal Years 

2010 to 2020 (Washington, D.C.: January 2010). 

23Under PPACA, federal spending on subsidies in the newly established insurance 

exchanges is capped after 2018 at 0.504 percent of GDP. As a result, the share of health 

insurance premiums paid by enrollees is scheduled to increase in years when spending 

exceeds this limit. Our Alternative follows CBO’s alternative assumption that a policy that 

would slow the growth of per-participant subsidies for health insurance coverage is not in 

effect and eligibility thresholds are modified to maintain the share of the population eligible 

for subsidies. 
Page 10 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

simulations in the first 10 years, we do not make assumptions about the 

composition of revenue over the long term in our simulations. The 

Baseline Extended simulation follows CBO’s baseline projections, which 

generally reflect current law, for the first 10 years and then holds revenue 

constant as a share of GDP. As a result, over the long term, revenue as a 

share of GDP is higher in the Baseline Extended than historical averages. 

In the Alternative simulation, expiring tax provisions are generally 

extended and the alternative minimum tax (AMT) amount is indexed to 

inflation. Revenue in the Alternative simulation is then held at the 40-year 

historical average. This assumption implies that, consistent with past 

experience, legislation will be enacted to offset some of the increases in 

revenue scheduled in current law.

Both simulations follow CBO’s projections for Social Security for the first 

10 years and the Trustees’ intermediate projections thereafter. See 

appendix I for more information on the assumptions used in the 

simulations and a description of technical changes that were made for 

this report.

The effect of PPACA on the long-term fiscal outlook depends largely on 

whether elements designed to control cost growth are sustained. Overall, 

there was notable improvement in the longer-term outlook after the 

enactment of PPACA under our Fall 2010 Baseline Extended simulation, 

which, consistent with federal law at the time the simulation was run, 

assumed the full implementation and effectiveness of the costcontainment provisions over the entire 75-year simulation period. In 

contrast, the long-term outlook in the Fall 2010 Alternative simulation 

worsened slightly compared to our January 2010 simulation. This is 

largely due to the fact that cost-containment mechanisms specified in 

Effect of PPACA on 

the Long-Term Fiscal 

Outlook Depends on 

Whether CostContainment 

Mechanisms are 

Sustained 
Page 11 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

PPACA are assumed to phase out over time while the additional costs 

associated with expanding federal health care coverage remain.24

Figure 1 shows that while the steps taken in PPACA to restrain spending 

on the federal health programs were significant, they were not sufficient to 

prevent an unsustainable increase in debt held by the public even under 

the more optimistic assumptions in our Baseline Extended simulation. 

The net effect of changes to spending and revenue on the federal budget 

were relatively small in the first few decades in both simulations, and the 

improvements in the Baseline Extended simulations from January 2010 to 

Fall 2010 do not significantly slow the growth in debt held by the public 

until the outyears. Debt as a share of GDP still reached the historical high 

of 109 percent by 2036 in the Fall 2010 Baseline Extended simulation—

just 1 year later than it did in the January 2010 Baseline Extended 

simulation. There was no change in the date when debt held by the public 

reached the historic high from the January 2010 Alternative simulation to 

the Fall 2010 Alternative simulation.

 

24There were also technical changes to assumptions about Medicare payments to 

physicians unrelated to PPACA that accounted for some of the difference. In our 

Alternative simulation, Medicare physician payment rate updates are adjusted based on 

OACT’s alternative projections to reflect the fact that in most years, Congress has acted to 

override reductions that would occur under current law. Our Fall 2010 Alternative 

assumed that physician payments rates would grow with inflation (using the Medicare 

Economic Index) beginning in 2010. This assumption resulted in higher Medicare 

spending on physician payments than our assumption in the January 2010 Alternative 

simulation that fees would remain at current levels (i.e., a physician fee schedule update 

of 0 percent).
Page 12 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Figure 1: Comparison of Debt Held by the Public in January 2010 and Fall 2010 Simulations

The effect of PPACA on the long-term fiscal outlook is seen largely 

through changes in federal spending on major federal health care 

programs. Figure 2 shows that federal spending on Medicaid, CHIP, and 

exchange subsidies increased in the Baseline Extended simulation, 

reflecting expanded eligibility and coverage. By 2035, spending on 

Medicaid, CHIP, and exchange subsidies in the Fall 2010 Baseline 

Extended simulation equaled 3.3 percent of GDP—0.7 percentage points 
Page 13 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

higher than Medicaid spending in the January 2010 Baseline Extended 

simulation—and continued to grow thereafter.25

Figure 2: Comparison of Spending on Major Federal Health Care Programs in the 

January 2010 and Fall 2010 Baseline Extended Simulations for Select Years

Note: Prior to the Fall 2010 update, federal spending for CHIP was included in our simulations under 

other mandatory spending. Starting in Fall 2010, we include federal spending for CHIP along with 

exchange subsidies in a single category with Medicaid. In January 2010, CBO projected that 

spending on CHIP would total $6 billion, or about 0.03 percent of GDP, in 2020. Including CHIP 

spending with Medicaid in the January 2010 Baseline Extended simulation would not materially affect 

the results shown in the figure.

 

25Our Fall 2010 simulations predated the June 2012 decision by the U.S. Supreme Court 

regarding the expansion of Medicaid to newly eligible populations and therefore assumed 

that every state would expand Medicaid eligibility as originally required under PPACA. In 

our most recent simulations published in Fall 2012, which incorporate CBO’s and the Joint 

Committee on Taxation’s revised 10-year estimates for the coverage provisions following 

the Supreme Court’s ruling, spending on Medicaid, CHIP, and exchange subsidies is not 

significantly different from those in our Fall 2010 simulations in part because the reduction 

in federal matching funds associated with covering fewer individuals in state Medicaid 

programs is partially offset by increased costs of the exchange subsidies as a result of 

larger numbers of low-income individuals enrolling in exchange plans. A discussion of 

uncertainty associated with these estimates is included later in this report. 
Page 14 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Spending on Medicare declined substantially in our Fall 2010 Baseline 

Extended simulation, reflecting the assumption of full implementation and 

effectiveness of the cost-containment mechanisms in PPACA. Spending 

on Medicare, for example, decreased 1.5 percentage points from 6.2 

percent of GDP in 2035 in the simulations run before PPACA was 

enacted to 4.7 percent in the simulations run immediately after 

enactment. The difference between our January 2010 and Fall 2010 

simulations widens in subsequent decades as the effects of slower 

growth in Medicare spending compound over time. Given the large role of 

Medicare spending in the federal budget, slowing growth of spending on 

the program would reduce, though not eliminate, the pressure federal 

health care spending is expected to put on the rest of the federal budget 

in coming decades.

The Trustees, CBO, and OACT have questioned whether the costcontainment mechanisms enacted in PPACA can be sustained over the 

long term, due in part to the challenges in sustaining increases in health 

care productivity. Prior to PPACA, payment updates for many Medicare 

services were based on the prices of goods and services, such as 

medical equipment and labor, needed to serve patients. PPACA required 

that these payment updates be reduced by a productivity adjustment, 

defined as a 10-year average of changes in annual economy-wide private 

productivity. This is expected to provide a strong financial incentive for 

health providers to enhance productivity, improve efficiency, or otherwise 

reduce their costs per service. The lower payment rate updates to most 

categories of Medicare providers specified under PPACA have only 

begun to be implemented. It remains unclear what actions providers will 

take to improve their productivity and reduce unnecessary expenditures in 

response to these lower payment rate updates. According to OACT, 

however, health care productivity gains have historically been small due 

to such factors as the labor-intensive nature of the industry and the 

individual customization of treatments in many cases.26

PPACA created a number of research and development initiatives––such 

as bundling Medicare payments for services that patients receive across 

Consequently, 

OACT said this makes it unlikely that actual health provider productivity 

will be equal to the economy as a whole over sustained periods.

 

26See CMS OACT, Projected Medicare Expenditures under Illustrative Scenarios with 

Alternative Payment Updates to Medicare Providers (Baltimore, MD: May 18, 2012). 
Page 15 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

a single episode of care and establishing the Medicare Shared Savings 

Program through which accountable care organizations can better 

manage and coordinate care across different settings—that have the 

potential to transform the health care payment and delivery system in 

ways that reduce federal health care spending consistent with the 

productivity adjustments. However, these initiatives are only just 

beginning to be tested. Accordingly, it is too early to know which will result 

in lasting changes and what effect they will have on future federal 

spending.

The role of IPAB in controlling cost growth is assumed to be limited under 

current law projections given that the productivity adjustments and other 

provisions contained in PPACA are estimated by the Trustees to keep 

Medicare spending below the targeted growth rate in all but 1 year.27

Reflecting these concerns, our Fall 2010 Alternative simulation assumed 

that cost-containment mechanisms described previously are fully 

implemented through 2019 and then begin to phase out; Medicare 

spending resumes its pre-PPACA growth rate by 2035. As a result, 

Medicare spending declined in most years compared to our January 2010 

simulation but by much less than under the Baseline Extended 

simulation.

Absent the full and effective implementation of productivity adjustments, 

IPAB’s task would be more daunting. It is not possible to predict at this 

time, however, what changes IPAB will propose to keep Medicare 

spending within the specified target and what the disposition of the 

recommendations will be.

28

 

27CMS OACT estimates that in 2019 Medicare spending will exceed the targeted growth 

rate by 0.1 percent. See CMS OACT, Projected Medicare Expenditures under Illustrative 

Scenarios with Alternative Payment Updates to Medicare Providers (Baltimore, MD: May 

18, 2012). 

(See fig. 3.) The Fall 2010 Alternative simulation also 

assumed that spending on exchange subsidies is not constrained by a 

provision in current law that would otherwise limit growth of exchange 

28In our Fall 2010 Alternative simulation based on the CMS OACT’s alternative scenario, 

physician payment rates grew with inflation (using the Medicare Economic Index), as 

opposed to the 0 percent physician fee schedule update assumed in January 2010, which 

resulted in higher spending. This offset some of the reductions in spending resulting from 

the cost containment mechanisms enacted in PPACA. 
Page 16 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

subsidies.29

Figure 3: Comparison of Spending on Major Federal Health Care Programs in the 

January 2010 and Fall 2010 Alternative Simulations for Select Years

In this simulation, spending on Medicaid, CHIP, and 

exchange subsidies equaled 3.5 percent of GDP in 2035—or roughly 0.9 

percentage points higher than in the January 2010 Alternative simulation. 

As a result, total federal health care spending was higher in the Fall 2010 

Alternative simulation than in the January 2010 simulation.

Notes: Prior to the Fall 2010 update, federal spending for CHIP was included in our simulations under 

other mandatory spending. Starting in Fall 2010, we include federal spending for CHIP along with 

exchange subsidies in a single category with Medicaid. In January 2010, CBO projected that 

spending on CHIP would total $6 billion, or about 0.03 percent of GDP, in 2020. Including CHIP 

spending with Medicaid in the January 2010 Alternative simulation would not materially affect the 

results shown in the figure.

 

29PPACA contains a provision intended to slow the growth of exchange subsidies after 

2018. Initially, the percentages of income that enrollees must pay are indexed so that the 

subsidies will cover roughly the same share of the total premium over time. After 2018, 

however, an additional indexing factor will apply in any year in which the total costs of 

exchange subsidies exceed a specified percentage of GDP. In its 2010 estimates, CBO 

expected this condition would probably be met after 2018. Therefore the shares of income 

that enrollees have to pay will increase more rapidly, and the shares of the premium that 

the subsidies cover will decline.
Page 17 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Figures 4 and 5 show that changes in other budgetary components 

between the January 2010 and Fall 2010 simulations had a smaller effect 

on the long-term fiscal outlook. As shown in these figures, increases in 

spending increase the primary deficit—or the difference between revenue 

and noninterest spending—and decreases in spending reduce the 

primary deficit. Increases in revenue also reduce the primary deficit. In 

August 2010, CBO projected that PPACA would increase federal revenue 

by $643 billion—or 0.3 percent of GDP—over the 10-year period from 

2011 through 2020.30

Overall, between January 2010 and Fall 2010, the long-term fiscal outlook 

improved in our Baseline Extended simulation. The primary deficit 

declined 1.5 percentage points as a share of GDP over the 75-year 

period in this simulation. (See fig. 4.) On the spending side, about 1.2 

percent of GDP of this improvement was attributable to PPACA. In 

contrast, as figure 5 shows, the primary deficit under our Alternative 

simulation increased by 0.7 percent of GDP during this time period, due 

largely to increased spending on Medicaid, CHIP, and exchange 

subsidies. 

This included an excise tax on certain high cost 

employer-sponsored health plans and increased Medicare Hospital 

Insurance tax for higher income individuals and families. These changes 

accounted for some but not all of the increase in revenue in the first 10 

years in both of our Fall 2010 simulations. They also affected the longterm revenue assumption in the Baseline Extended simulation, which 

assumed that revenue remains constant as a share of the economy after 

2020. However, we did not make specific assumptions about the 

particular tax policies and provisions that underlie the aggregate revenue 

assumption. Increases in revenue related to PPACA did not affect the 

long-term assumption for revenue in the Alternative simulation, which 

assumes that revenues return to the historical average after 2020.

 

30CBO incorporates the effects of certain provisions of PPACA on federal revenue in its 

long-term projections. In The 2012 Long-Term Fiscal Outlook, CBO estimated that 

implementing several provisions of the PPACA will raise revenues as a share of GDP by 

0.8 percentage points by 2037. 
Page 18 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Figure 4: Changes in Noninterest Spending, Revenue, and the Primary Deficit in the 

Baseline Extended Simulation

Note: Increases in spending increase the primary deficit—or the difference between revenue and 

noninterest spending—and decreases in spending reduce the primary deficit. Increases in revenue 

also reduce the primary deficit.
Page 19 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Figure 5: Changes in Noninterest Spending, Revenue, and the Primary Deficit in the 

Alternative Simulation

Note: Increases in spending increase the primary deficit—or the difference between revenue and 

noninterest spending—and decreases in spending reduce the primary deficit. Increases in revenue 

also reduce the primary deficit.

Our simulations provided two scenarios based on broad sets of 

assumptions about health care spending and other components of federal 

spending and revenue. Long-term projections, however, are inherently 

uncertain and future health care costs in particular are difficult to 

estimate. This uncertainty, which predates the enactment of PPACA, 

increases the further the model looks out into the future. While some of 

this uncertainty is related to the implementation and effectiveness of 

provisions of PPACA, there is also broader uncertainty about the future 

underlying rate of health care cost growth before cost-containment 

mechanisms are applied. The projected rate of growth largely depends on 

the assumptions used. To examine these assumptions, we divided 

spending growth into two types of drivers: (1) enrollment in the major 

federal health care programs and (2) growth in health care spending per 

capita. While both have contributed to the growth in federal health care 

Health Care Spending 

in Our Long-Term 

Simulations Largely 

Depends on 

Assumptions about 

Enrollment and 

Excess Cost Growth
Page 20 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

spending over the past several decades, their relative role in explaining 

rising future federal health care spending differs over time.

Spending on both Medicare and Medicaid has increased in the past 

several decades due in part to a steady increase in the number of 

enrollees. In calendar year 1970, approximately 9 percent of the U.S. 

population was enrolled in Medicare. As the U.S. population has aged 

and more people have enrolled in the program, this increased to 

approximately 15 percent in calendar year 2011. Medicaid enrollment, 

while more volatile than Medicare enrollment, has also generally 

increased as states have decided to expand eligibility and economic 

recessions have increased the number of people eligible. For example, in 

fiscal year 1970, approximately 7 percent of the U.S. population was 

enrolled in Medicaid. This increased to approximately 17 percent in fiscal 

year 2010 (the most recent year historical data is available). However, 

there have been periods when enrollment did not grow. For example, in 

the 1990’s, strong economic growth and the move from Aid to Families 

With Dependent Children to the Temporary Assistance for Needy 

Families block grant, which was designed to help needy families reduce 

their dependence on federal assistance, helped keep enrollment steady 

at approximately 12 percent of the population between fiscal years 1995 

and 2000.

Enrollment in the major federal health care programs is expected to 

continue to increase in the near term due both to the aging of the U.S. 

population and to expanded eligibility. Consequently, increasing 

enrollment is expected to be the most important driver of federal health 

care spending over the next couple of decades. Future enrollment trends 

for Medicare, particularly in the near term, are reasonably clear. The 

Trustees expect a large increase in enrollment in Medicare between 2010 

and 2030 as the baby boom generation reaches age 65 and are eligible 

to receive benefits.31

 

31The “baby boom” generation are people born between 1946 and 1965. 

As figure 6 shows, the number of baby boomers 

turning 65 is projected to grow in coming years from an average of about 

7,600 per day in 2011 to more than 11,000 per day in 2029.

Enrollment is a Key Driver 

of Federal Health Care 

Spending Growth in the 

Near Term
Page 21 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Figure 6: Daily Average Number of People Turning 65

Note: Data are from the U.S. Census Bureau’s National Population Projections. For this analysis, we 

used data from the low net international migration series.

Future enrollment patterns for Medicaid and the exchange subsidies are 

less clear due both to the uncertainty about future policy changes and to 

other factors such as income growth that affect individuals’ eligibility.

• Medicaid. In its March 2012 projections, which assumed states will 

expand Medicaid coverage to all eligible individuals as provided in 

PPACA, CBO estimated that enrollment in Medicaid would increase 

from roughly 54 million people in fiscal year 2011 (or roughly 17 

percent of the population) to 75 million by fiscal year 2022 (or roughly 

22 percent of the population). This includes roughly 17 million 

nonelderly people projected to be enrolled in the program in 2022 as a 

result of expanded coverage provided by PPACA.32

 

32This estimate also includes a small number of people projected to be enrolled in CHIP in 

2022 as a result of expanded coverage provided by PPACA. For more information on 

PPACA’s effects on coverage, see CBO Updated Estimates for the Insurance Coverage 

Provisions of the Affordable Care Act (Washington, D.C.: March 2012). 

The people who 
Page 22 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

will be newly eligible for Medicaid under PPACA consist primarily of 

nonelderly adults with low income along with a smaller number of 

children from low income households. According to OACT, both 

groups are expected to be less costly to cover on a per enrollee basis 

than current enrollees. In March 2012, CBO estimated that expanding 

Medicaid coverage and CHIP coverage as provided for in PPACA 

would increase federal spending by $136 billion in 2022.

CBO has since updated its estimates to reflect the June 2012 U.S. 

Supreme Court decision on PPACA.33 PPACA, as enacted, required 

states to extend Medicaid to most nonpregnant nonelderly individuals up 

to 133 percent of the FPL and provided states with an enhanced federal 

match for this newly eligible population.34 States that fail to cover 

mandatory Medicaid populations are at risk of losing federal match for 

their entire Medicaid program. The Supreme Court subsequently ruled 

that states that choose not to expand Medicaid eligibility to these newly 

eligible individuals will only be subject to a penalty of forgoing the 

enhanced federal matching funds associated with covering this population 

rather than foregoing federal matching funds for their entire program. 

States therefore have the option of deciding whether to expand Medicaid 

coverage to newly eligible populations as provided by PPACA.35

 

33See CBO, Estimates for the Insurance Coverage Provisions of the Affordable Care Act 

Updated for the Recent Supreme Court Decision (Washington, D.C.: July 2012). 

CBO 

notes that what states will decide to do regarding the Medicaid expansion 

under PPACA is highly uncertain. States face both financial incentives 

and disincentives to participate in the Medicaid expansion. On the one 

hand, the federal government will cover a large share of the costs of the 

expansion. On the other hand, states would ultimately have to bear some 

costs during a period when their budgets are already under pressure, in 

part from the rising costs of the existing Medicaid program.

34PPACA also provides for a 5 percent income disregard when calculating modified 

adjusted gross income for determining Medicaid eligibility, which effectively increases this 

income level to 138 percent of the FPL. States will receive a 100 percent federal match for 

newly eligible individuals from 2014 through 2016, with this match slowly decreasing to 90 

percent by 2020.

35Since CBO’s estimate was prepared, CMS issued guidance indicating that from 2014 

through 2016 states that do not expand to all eligible individuals with income at or below 

133 percent of FPL will not be eligible for the 100 percent enhanced federal matching rate.
Page 23 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

• Exchange subsidies. In projections prepared prior to the Supreme 

Court ruling, CBO estimated the exchanges would subsidize health 

insurance coverage for 22 million nonelderly people by fiscal year 

2022 and increase federal spending by $127 billion in that year.36

Following the Supreme Court ruling, CBO revised this estimate 

anticipating that a portion of the people will not be eligible for Medicaid 

as a result of states choosing not to expand their Medicaid programs 

and will instead be eligible for federal subsidies for coverage offered 

through the exchanges.37 As a result, CBO increased its estimates of 

the cost of exchange subsidies. However, as noted earlier, it remains 

uncertain how the states will respond to the Supreme Court’s ruling. 

Further, CBO notes some people will find the exchange subsidies less 

attractive than Medicaid because of the higher out-of-pocket costs 

they will face in the exchanges. There is also uncertainty about the 

extent to which private employers might choose to drop health 

insurance coverage and shift workers to the exchanges.38

Spending on major federal health programs is affected not just by the 

number of enrollees but also by the age composition and health status of 

the enrollees. Elderly individuals, for example, typically have higher health 

care costs than younger individuals and very elderly individuals, those 85 

or older, typically have the highest costs. For Medicare enrollees 85 or 

older, spending in 2008 was more than $13,000 per enrollee compared to 

about $7,600 for enrollees ages 65 to 74. Similarly, Medicaid’s spending 

varies considerably among different type of enrollees. Children and adults 

under the age of 65 account for almost 75 percent of Medicaid’s 

enrollees, but have much lower per capita costs than the aged (those 65 

or older) or disabled. For example, in fiscal year 2010, Medicaid spent 

approximately $3,000 per child and $4,000 per adult under age 65, 

 

36CBO, Updated Estimates for the Insurance Coverage Provisions of the Affordable Care 

Act (Washington, D.C.: March 2012).

37In particular, individuals with income between 100 percent and 138 percent of the FPL 

who live in a state that chooses not to expand Medicaid coverage or to defer such an 

expansion and who meet certain other criteria would be eligible for such subsidies. For 

more information, see CBO, Estimates for the Insurance Coverage Provisions of the 

Affordable Care Act Updated for the Recent Supreme Court Decision (Washington, D.C.: 

July 2012).

38We recently issued a report that examined estimates of the effect of PPACA on the 

extent of employer-sponsored coverage. See, GAO, Patient Protection and Affordable 

Care Act: Estimates of the Effect on the Prevalence of Employer-Sponsored Health 

Coverage, GAO-12-768 (Washington, D.C.: July 13, 2012). 
Page 24 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

compared to approximately $15,000 and $17,000, for each aged 

beneficiary and each disabled beneficiary, respectively. Medicaid already 

has a large role in funding long-term care, such as nursing homes, for 

aged persons. The increase in the number of people 85 or older in the 

next 10 years is expected to have a major effect on long-term care 

spending for Medicaid. As such, a key driver of federal spending for both 

Medicare and Medicaid is the aging of the population. Enrollment from 

this population did not change as a result of PPACA.

The share of the federal budget devoted to Medicare and Medicaid has 

increased over the past several decades due not only to increases in 

enrollment but also due to increases in health care spending per enrollee. 

The extent to which the annual growth rate of health care spending per 

capita exceeds the annual growth rate of potential GDP per capita 

adjusted for demographic characteristics, is referred to as excess cost 

growth. Over the last 35 years, excess cost growth averaged around 2 

percent but has fluctuated during this time period. Excess cost growth 

slowed for Medicare, for example, after the introduction of a prospective 

payment system in fiscal year 1984 in which Medicare pays a 

predetermined rate for each hospital admission—rather than simply 

reimbursing providers for costs, which provides little incentive for 

efficiency. Excess cost growth also slowed in the 1990s as enrollment 

increased in managed care plans. However, it is not clear to what extent 

these slowdowns represent one-time downward shifts in health care costs 

or more permanent changes in the underlying growth rate. Overall excess 

cost growth in the United States is thought to have returned closer to the 

historical average in the 2000s.

Excess cost growth leads to an ever-growing share of the nation’s income 

being spent on health care, crowding out spending on all other goods and 

services. Going forward, CBO and the Trustees both assume that excess 

cost growth will decrease over time because of the financial pressure 

health care spending is putting on the federal government, states, 

businesses, and households. How and when this transition takes place, 

however, is highly uncertain. Figure 7 shows that varying the excess cost 

growth assumption in our simulations dramatically alters the share of 

national income needed to fund federal health care spending. Under the 

standard set of assumptions for health care spending in the Baseline 

Extended simulation, excess cost growth averages 0.2 percentage points 

for Medicare and 0.8 percentage points for Medicaid, CHIP, and 

exchange subsidies over the long term. Under these assumptions, 

spending on these programs would rise from less than 5 percent of GDP 

Growth in Health Care 

Spending Per Capita is a 

Key Driver of Federal 

Health Care Spending Over 

the Long Term
Page 25 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

in 2012 to more than 9 percent in 2050. If excess cost growth averaged 2 

percent per year after 2022—the average rate between 1975 and 2010—

federal health spending in our Baseline Extended simulation would rise 

quickly and would account for more than 13 percent of the entire U.S. 

economy by 2050.

Even with lower assumptions about excess cost growth, a growing share 

of national income would be needed to fund federal health programs. 

Under the 0-percent excess cost growth scenario, spending on Medicare, 

Medicaid, CHIP, and exchange subsidies would continue to grow as a 

share of GDP due to the aging of the population and other enrollment and 

demographic trends described earlier. In 2050, spending on the major 

federal health care programs would be 8 percent of GDP and gradually 

increase thereafter. At the end of the 75-year simulation period, spending 

on Medicare, Medicaid, CHIP, and exchange subsidies in the 0-percent 

excess cost growth scenario would be higher than at the beginning of the 

scenario in fiscal year 2022, but still below the levels shown in our 

standard Baseline Extended and Alternative simulations.
Page 26 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Figure 7: Federal Health Care Spending under Different Excess Cost Growth Scenarios

Notes: Excess cost growth changes begin in fiscal year 2023. In the Fall 2012 Baseline Extended 

simulation, excess cost growth averages 0.2 percentage points for Medicare and 0.8 percentage 

points for Medicaid, CHIP, and exchange subsidies over the long term. In the Fall 2012 Alternative 

simulation, excess cost growth averages 0.8 percentage points for Medicare, Medicaid, CHIP, and 

exchange subsidies over the long term.

Figure 8 shows that slowing the rate of excess cost growth could slow the 

buildup of debt held by the public considerably and help put the budget on 

a more sustainable path. Assuming revenue and nonhealth spending 

follow the assumptions in the Baseline Extended simulation and excess 

cost growth for health care averages 2 percentage points each year, debt 

held by the public would be more than 170 percent of GDP in 2050. 

Assuming 0 percent excess cost growth after 2022—an outcome that has 

not been sustained for any extended length of time over the past several 

decades—debt held by the public would be roughly 91 percent of GDP in 

2050 in the Baseline Extended simulation. Debt held by the public would 

continue to slowly increase thereafter largely because of the interest 

costs of financing the federal government’s accumulated debt and 

increasing enrollment in federal health programs.
Page 27 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Figure 8: Debt Held by the Public in the Baseline Extended and Alternative Simulations with Different Assumptions for 

Excess Cost Growth

Notes: Federal revenue and nonhealth spending in the 0 and 2 percent excess cost growth scenarios 

are based on our Fall 2012 simulations. Excess cost growth changes begin in fiscal year 2023. In the 

Baseline Extended simulation, excess cost growth averages 0.2 percentage points for Medicare and 

0.8 percentage points for Medicaid, CHIP, and exchange subsidies over the long term. In the 

Alternative simulation, excess cost growth averages 0.8 percentage points for Medicare, Medicaid, 

CHIP, and exchange subsidies over the long term.

Figure 8 also shows that slowing health care cost growth is insufficient to 

close the imbalance between spending and revenue in the Alternative 

simulation in the next few decades. In this simulation, revenue and 

spending follow historic trends and past policy preferences. Even 

assuming 0 percent excess cost growth after 2022, debt held by the 

public rises steeply in the Alternative simulation, reaching more than 100 

percent of GDP (or the size of the total economy) by 2025, and continuing 

to grow at a rapid rate thereafter. This demonstrates that significant policy 

changes beyond those designed to control health care cost growth would 

need to be taken in the near term to put federal debt on a more 

sustainable path.
Page 28 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Simulations based on broad assumptions about future excess cost growth 

such as these are helpful for illustrating how different rates of growth in 

spending per capita would affect future federal spending on health care. 

However, the simulations do not provide insight into the underlying factors 

driving growth in health care cost per capita. The major federal health 

care programs are highly integrated with the rest of the health care 

system and influenced not only by policies and laws, but also by future 

demographic and economic trends; the development and deployment of 

medical technology; the cost and availability of insurance; and the 

responses of health care providers, consumers, and policymakers to 

these trends. As policymakers consider how to put the federal 

government on a more sustainable path, it will be important to understand 

what the specific factors driving cost growth are, how they are 

interrelated, and how changes in these factors could affect federal health 

care spending.

Technological Change 

Has Been the Largest 

Driver of Health Care 

Cost Growth, and 

with Health Insurance 

Coverage and 

Increasing Income, is 

Likely the Largest 

Source of Uncertainty 

for Health Care Cost 

Projections 
Page 29 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

A growing U.S. population directly increases overall health care spending; 

however, the causes of rising health care cost per capita are more difficult 

to identify.39 Per capita health care spending grew at an average of 4.9 

percent per year between 1965 and 2005, while per capita GDP grew at 

an average of 2.1 percent per year.40 There is general agreement among 

researchers about the factors that drive health care cost growth and the 

relative size of influence of this growth, although each factor has a unique 

mechanism to affect health care costs, and therefore, a different relative 

influence on health care cost growth (see fig. 9).41

 

39This finding focuses on the drivers of health care spending growth, which can be used to 

help understand drivers of excess cost growth; however, there are important differences. 

Health care spending growth describes the increase in overall health care spending over 

time, while excess cost growth, measures the extent to which health care spending per 

capita grows faster than the GDP per capita. 

40CBO, Technological Change and the Growth of Health Care Spending (Washington, 

D.C.: January 2008).

41CBO, Technological Change and the Growth of Health Care Spending (Washington, 

D.C.: January 2008) presents similar findings based on Newhouse (1992), Cutler (1995), 

and Smith et al. (2000). Additional information is presented here from Smith et al. (2009), 

which improves upon earlier studies by using an expanded model of causal factors and 

multi-national information on the influence of income on health care spending. Also, a 

CBO analysis from 2009 provides new information on the influence of defensive medicine, 

which was not included in any of the study models.

Technological Change 

Accounts for about 50 

Percent of Health Care 

Cost Growth
Page 30 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Figure 9: Estimates of the Percentage of Past Real Health Care Cost Growth Per Capita Explained by Different Factors

Notes: Presentation of information from Sheila Smith, Joseph P. Newhouse, and Mark S. Freeland, 

“Income, Insurance, and Technology: Why Does Health Spending Outpace Economic Growth,” 

Health Affairs, vol. 28, no. 5 (2009); Sheila D. Smith, Stephen K. Heffler, and Mark S. Freeland, Ph.D, 

The Impact of Technological Change on Health Care Cost Spending: An Evaluation of the Literature, 

working paper, 2000; David M. Cutler, “Technology, Health Costs, and the NIH,” Harvard University 

and the National Bureau of Economic Research, (paper prepared for the National Institutes of Health 

Economics Roundtable on Biomedical Research, September 1995); and J. P. Newhouse, “Medical 

Care Costs: How Much Welfare Loss?,” Journal of Economic Perspectives, vol. 6, no. 3 (Summer 

1992).

The sum of percentage explained for all factors may not equal 100 percent due to rounding, or due to 

a range of percentages being reported for certain factors when different assumptions of price 

elasticity and medical productivity were tested. Newhouse (1992) analyzes data from 1940 to 1990 

for income, data from 1950 to 1987 for demographics, and data from 1950 to 1980 for health 

insurance. Cutler (1995) and Smith et al. (2000) analyze data from 1940 to 1990. Smith et al. (2009) 

analyzes data from 1960 to 2007.

a

Smith et al. (2000) attributed between 38 and 62 percent of growth in health care cost per capita to 

technological change. Smith et al. (2009) attributed between 27.4 and 48.3 percent of growth in 

health care cost per capita to technological change.

b

Smith et al. (2000) estimated the effect of increases in income to be between 11 and 18 percent 

based on different assumptions of income elasticity (between 0.5 and 0.8). Smith et al. (2009) 

estimated the effect of increases in income to be between 28.7 and 43.1 percent based on different 
Page 31 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

assumptions of income elasticity (between 0.6 and 0.9).

c

Health care price inflation was not estimated by Newhouse (1992). Smith et al. (2000) estimated the 

effect of health care price inflation to be between 11 and 22 percent based on different assumptions 

of productivity growth (between 0 percent and half the economy-wide rate) and of the proportion of 

price inflation attributable to rising rents (between 25 and 75 percent). Smith et al. (2009) estimated 

the effect of health care price inflation to be between 5 and 18.8 percent based on different 

assumptions of medical care productivity (between 0 percent and economy average) and of income 

elasticity (between 0.6 and 0.9).

d

Increase in administrative expenses was not estimated by Newhouse (1992) nor Smith et al. (2009). 

Smith et al. (2000) estimated the effect of avoidable administrative expense to be between 3 and 10 

percent based on the assumption that 25 to 75 percent of avoidable administrative expense 

represents growth between 1940 and 1990.

Technological change (36 to 65 percent): Technological change 

affecting health care cost growth may take many forms. CBO defines 

technological advances as changes in clinical practice that enhance the 

ability of providers to diagnose, treat, or prevent health problems. 

Examples of technological advances include new drugs, devices, 

procedures, and therapies, as well as new applications of existing 

technologies.42 While not all new technologies increase health care costs, 

technological change as a whole has been the dominant cause of 

increases in health care spending.43

The effect of technological change on health care costs may depend, in 

part, on the type of treatment to which the new technology is applied. 

Cutler describes the following classes of treatment and their relative 

costs:44

 

42CBO, Technological Change and the Growth of Health Care Spending, 12.

43It should be noted that all four studies presented in figure 9 modeled the influence of the 

non-technology factors on health care cost growth, and assigned the residual influence to 

technological change. This method is primarily employed because there is no direct 

measure of technological change over time. To address the interactive effects of other 

factors in the model, Smith et al. (2009) used a more nuanced method than the other 

studies which had the effect of attributing relatively more health care cost growth to 

increases in income and aging, thereby reducing the amount attributed to technological 

change. Rather than using the residual approach, Okunade and Murthy found that health 

care research and design spending, used as a proxy for technological change in health 

care, is a long-run driver of rising health care expenditures. See Albert A. Okunade and 

Vasudeva N. R. Murthy, “Technology as a ‘major driver’ of health care costs: a 

cointegration analysis of the Newhouse conjecture,” Journal of Health Economics, vol. 21, 

issue 1 (2002). 

44David M. Cutler, “Technology, Health Costs, and the NIH,” Harvard University and the 

National Bureau of Economic Research, (paper prepared for the National Institutes of 

Health Economics Roundtable on Biomedical Research, 1995).
Page 32 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

• Nontreatment applies to diseases that cannot be treated, such as 

end-stage cancers, and thus have a relatively low cost of medical 

care.

• Disease management refers to halfway technologies that can improve 

quality of life when cure or prevention is not possible. Disease 

management, such as dialysis for end-stage renal disease, is often 

very expensive.

• Prevention and cures for disease may have low marginal costs when 

they are available; however, preventative therapies are often provided 

to an entire population, and to the extent that new cures are more 

effective and cheaper than older treatments, demand for new cures 

may increase significantly. Thus, even when the unit price of new 

preventative therapies and cures are low, large quantities provided 

may increase overall spending for these treatments.

In general, a technological change that enables providers to treat a 

previously untreatable disease will increase health care spending, while 

expanding disease management or shifting disease management to 

prevention or cure can lead to either increased or decreased health care 

spending. However, the introduction of new treatments and technologies 

may result in increased health care spending due to the possibility that 

health complications may arise from a new treatment, or that patients 

survive one disease long enough and eventually are diagnosed with an 

additional disease with additional treatment cost.

It should be noted that a complete assessment of health care spending 

for new technologies should also consider the value, often measured by 

improved health functioning; increased life expectancy; or improved 

economic productivity produced by those technologies. For example, 

Cutler and McClellan found that increases in health care costs due to 

technological changes in the treatments for heart attacks, low-birthweight 

infants, depression, and cataracts was more than offset by increased life 

expectancy and improved productivity made possible by improved 

health.45

 

45David M. Cutler and Mark McClellan, “Is Technological Change in Medicine Worth It?,” 

Health Affairs, vol. 20, no. 5 (2001). In this paper, Cutler and McClellan measure 

increases in health and life expectancy using quality-adjusted life years and a commonly 

used assumption that the value of a year of life in the absence of disease is $100,000.

They also concluded that the value of increased longevity per 
Page 33 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

person between 1950 and 1990 was larger than the increase in per capita 

health care spending over the same period.

Chandra and Skinner assess technological change by categorizing 

innovations based on their health care productivity, or the improvement in 

health outcomes, such as longevity or health functioning, per dollar 

increase in cost.46

Increases in income (5 to 36 percent): As personal income increases, 

people demand more and better goods and services, including health 

care. This means that holding other factors constant, as higher personal 

income increases the quantity and quality of care demanded, overall 

health care spending increases as well. GDP is a good indicator of the 

effect of increasing income on health care spending. When GDP is 

growing, many Americans experience increases in income and will 

demand more health care services. When the rate of GDP growth 

declines, such as during the recent recession, health care spending 

growth may slow down; however, the magnitude of impact on health care 

spending may be smaller than compared to periods of higher GDP growth 

due to the persistent relationship of increasing income leading to the 

production of new technologies. To add further context to this 

The first category includes highly productive 

treatments, which may be inexpensive, such as aspirin and beta-blockers, 

or expensive, such as anti-retroviral drugs for treating people with 

HIV/AIDS. The second category includes treatments with substantial 

benefits for some patients, but a diminished benefit for others. For 

example, heart attack patients treated within 12 hours of a heart attack 

receive large benefits from angioplasty and placement of a stent; 

however, the benefits for patients with stable angina, chest pain or 

discomfort, are less clear. The final category includes treatments with little 

benefit or scientific evidence. Treatments in this category are more likely 

to be focused on treatment for chronic conditions. Chandra and Skinner 

find that much of the improvement in health is generated by treatments in 

the first category, while much of the cost is generated by treatments in the 

third category, and therefore conclude that health insurance interacts with 

technological change to drive health care cost growth as health insurance 

provides access to new technologies for patients who may experience 

little health benefit.

 

46Amitabh Chandra and Jonathan Skinner, “Technology Growth and Expenditure Growth 

in Health Care,” Journal of Economic Literature, vol. 50, no. 3 (2012).
Page 34 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

relationship, the income elasticity for health care services, that is the 

magnitude of the association between income and demand for health 

care services, may vary across households and over time. While there 

are a variety of assessments of the effect of income on health care 

expenditures, historical data from the United States suggest that for a 10 

percent increase in income, health expenditures will rise between 2 and 4 

percent.47 Incorporating data from other countries to estimate the 

relationship at the national level and including the effect of other factors 

affecting health spending that are correlated with real per capita GDP 

raises the increase in health care expenditures to about 14 percent.48

Health insurance expansions (10 to 13 percent): The expansion of 

health insurance increases health care cost per capita as people demand 

more health care when they are better insured. Health insurance has 

expanded in two ways: (1) by covering an increasing share of the 

population and (2) by covering each person more completely. Both of 

these pathways decrease the out-of-pocket expenses that beneficiaries 

pay through deductibles and cost-sharing, which have declined as a 

share of overall health care spending.

These two pathways help explain how health care costs may be affected 

when considering different types of health insurance. A recent study 

found that having Medicaid insurance in Oregon increased the likelihood 

of any hospitalization by 30 percent compared to having no insurance.49

 

47Joseph P. Newhouse, “Medical Care Costs: How Much Welfare Loss?” Journal of 

Economic Perspectives, vol. 6, no. 3, (Summer 1992), 7-8.

Older research from the Rand health insurance experiment suggests that 

total per capita expenditures increased by about 30 percent for 

48Sheila Smith, Joseph P. Newhouse, and Mark S. Freeland, “Income, Insurance, and 

Technology: Why Does Health Spending Outpace Economic Growth,” Health Affairs, vol. 

28, no. 5 (2009), 1279-1280.

49Amy Finkelstein, Sarah Taubman, Bill Wright, Mira Bernstein, Jonathon Gruber, Joseph 

Newhouse, Heidi Allen, Katherine Baicker, The Oregon Health Study Group, “The Oregon 

Health Insurance Experiment: Evidence from the First Year,” National Bureau of Economic 

Research working paper series, no. 17190, 2011.
Page 35 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

beneficiaries receiving free care compared to those in a plan similar to 

current high-deductable insurance plans.50

Furthermore, the relative comprehensiveness of coverage and out-ofpocket expenses differs by insurer category, such as a private insurer, 

Medicare, or Medicaid. Therefore, health care spending may increase 

when people switch to a more comprehensive type of health insurance 

coverage, such as switching from Medicaid to private health insurance.

Health care price inflation (10 to 19 percent): Health care price inflation 

contributes to health care cost growth; however, the precise impact of 

health care price inflation on overall health care cost growth is not known. 

Unlike many markets, prices in the health care market are difficult for 

consumers to discern and therefore, infrequently used to determine which 

provider to see or which service to undergo, when options are available. 

While there may not be a strong or direct influence from competition on 

price inflation, there are indirect mechanisms in both the public and 

private health insurance markets. In the private health insurance market, 

some consumers comparison shop for health insurance plans—or 

employers comparison shop on their behalf—and insurance plans use 

contracts with providers to restrict the prices charged for services 

provided. The extent to which this mechanism limits cost growth varies by 

insurance plan type and the incentives each plan type imposes to limit 

health care costs. For example, fee-for-service plans generally pay 

providers a set amount to provide a specific service and therefore provide 

little or no incentive to limit costs; however, plans offered by health 

maintenance organizations may limit health care costs by encouraging 

the efficient provision of health care services through mechanisms such 

as capitated payments and utilization review, as well as through contracts 

with low-cost providers or those offering discounted rates. In the market 

for public health insurance, various strategies by federal and state 

governments to restrict inflation have been used over time, including state 

 

50Joseph P. Newhouse and the Insurance Experiment Group, Free for All?: Lessons from 

the RAND Health Insurance Experiment, (Cambridge, MA: Harvard University Press, 

1993).
Page 36 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

certificate of need requirements and prospective payment systems for 

Medicare services.51

Increases in administrative expenses (7 to 13 percent): The cost of 

administering health care has several sources, and has proven difficult to 

identify. Despite the difficulty in estimating administrative expenses, 

economists generally agree that they contribute to health care cost 

growth. Increases in administrative expenses may be due to the more 

complex and changing structure of the insurer and provider relationship. 

As a result, increased effort and new technology to deal with coding and 

filing claims, billing, and maintaining medical records may have increased 

administrative expenses.

Aging (2 to 7 percent): The relative aging of the U.S. population 

contributes to increasing health care costs. An increasing share of the 

population that is older increases average health care costs per capita 

due to the additional medical care older Americans generally require. 

While an aging U.S. population has increased health care costs overall, 

the contribution of aging has been relatively small.

Changes in the amount of defensive medicine and supplier-induced 

demand:52

 

51State certificate of need requirements generally aim to restrain health care costs and 

allow for coordinated planning of the creation of new health care provider locations and 

offering of new services. Prospective payments, such as those made through Medicare’s 

inpatient prospective payment system, are predetermined payment amounts based on the 

estimated costs of an efficient provider rather than the actual costs incurred by a particular 

provider.

Because the clinical value of a medical service may vary by 

patient and categorization of a service as defensive or supplier-induced 

depends on intent, it is difficult to identify these services. Defensive 

medicine and supplier-induced demand were either not included or found 

to be zero in the macro-studies determining the relative influence of 

various factors on health care cost growth presented in figure 9; however, 

several studies on specific procedures show that they do contribute to 

increasing health care costs. CBO reported that enacting certain tort 

52Defensive medicine refers to health care services that have little or no clinical value, but 

that physicians order or perform at least partly to help avoid adverse judgments in 

malpractice lawsuits. In contrast, if providers who are paid on a fee-for-service schedule 

increase the volume of services provided in order to increase their own income, the 

increase in service use is described as supplier-induced demand. CBO, Technological 

Change and the Growth of Health Care Spending, p. 11-12.
Page 37 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

reform proposals designed to limit defensive medicine would have 

reduced national health care spending by $11 billion in 2009, or 0.5 

percent of health care expenditures, through decreased medical liability 

insurance premiums and lower utilization of health care services.53 While 

several studies show evidence of supplier-induced demand for particular 

services, including imaging services and procedures provided at 

physician-owned specialty hospitals, no study characterizes the overall 

impact of supplier-induced demand on health care cost growth.54

Many of the factors listed previously may not affect health care cost 

growth independently; instead they have combined effects through 

interactions in the health care market. For example, researchers believe 

that the influence of technological change on health care spending has 

been facilitated by higher historical levels of fee-for-service insurance, 

which incorporates less utilization review compared to managed care, 

and by periods of increasing per capita income which is associated with 

increased demand for new technologies.

Although there is some consensus among researchers about which 

factors drive health care cost growth, there is considerable uncertainty 

about the magnitude of impact of each factor on future health care cost 

growth. Population growth is relatively predictable and barring a 

pandemic or similar catastrophic event, is not likely to contribute much 

uncertainty to health care cost projections. More uncertainty is likely to be 

associated with factors influencing health care spending per capita, 

particularly technological change, given its varied pathways of influence 

on health care cost growth. The following is our analysis of the relative 

uncertainty associated with factors influencing health care spending per 

capita.

 

53CBO, Analysis of the Effects of Proposals to Limit Costs Related to Medical Malpractice 

(“Tort Reform”), Letter to the Honorable Orrin G. Hatch (Washington, D.C.: Oct. 9, 2009).

54GAO, Higher Use of Advanced Imaging Services by Providers Who Self-Refer Costing 

Medicare Millions, GAO-12-966 (Washington, D.C.: Sept. 28, 2012). J. M. Mitchell, “The 

Prevalence of Physician Self-Referral Arrangements after Stark II: Evidence from 

Advanced Diagnostic Imaging,” Health Affairs, web exclusive, Apr. 17, 2007, w415-w424. 

J. M. Mitchell, “Effect of Physician Ownership of Specialty Hospitals and Ambulatory 

Surgery Centers on Frequency of Use of Outpatient Surgery,” Archives of Surgery, vol. 

145, no. 8 (2010).

Key Uncertainties for 

Health Care Cost 

Projections are 

Technological Change, 

Increases in Income, and 

Health Insurance 

Expansions 
Page 38 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Technological change: While analysis of the number and types of 

medical technologies that are expected to be introduced in the next few 

years may yield some information about the range of possible impact of 

technology on health care spending per capita, the large number of 

sources of technological change makes this cost driver the most 

uncertain for estimating future health care costs. Much of this uncertainty 

is due to the unknown costs and effectiveness of changes in clinical 

practice—such as the introduction of new pharmaceutical drugs, medical 

devices, diagnostic tests, and procedures to treat disease—while the 

development and incorporation of nonclinical technologies—such as 

health information technology—also contribute to the uncertainty of future 

health care costs. Moreover, the development of new medical technology 

is influenced by future health insurance expansions and increases in 

income, further reducing the predictability of the impact of technological 

change on future health care costs.

Increases in income: Based on expectations of future GDP growth and 

changes in the distribution of income among Americans, the influence of 

increases in income on health care cost growth is somewhat uncertain in 

the near future and likely to increase in uncertainty in the long-run. 

Because increasing personal income generally increases demand for 

health care services, the extent to which future increases in personal 

income will affect health care cost growth can be approximated using 

expectations of future growth in aggregate income, as measured by GDP, 

and changes in how that income is distributed. If a given increase in GDP 

is associated with an increase in income for a larger proportion of 

Americans, then the increase in GDP will generate a larger increase in 

health care cost growth. Together, the expected volatility in future GDP 

growth and possible changes in the distribution of income among 

Americans leads us to believe that there is some uncertainty surrounding 

the size of the impact that increases in income may have on future health 

care cost growth, and that the uncertainty is larger for the more distant 

future.

Health insurance expansions: The expansion of health insurance may 

have some associated uncertainty for future health care costs per capita. 

This uncertainty is likely to have a lower bound of maintaining current 

insurance levels and an upper bound based on increasing both the 

number of insured Americans and the depth of coverage for each person. 

While future scenarios with decreasing insurance levels are possible, 

current policy debate is focused on increasing insurance levels. Possible 

increases in health insurance include the expansion of private insurance 

and Medicaid to cover the approximately 49 million Americans uninsured 
Page 39 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

as of 2011, which would remove barriers to health care and increase 

health care spending.

Health care price inflation: Changes in the structure of payment models 

and health insurance plan types will help limit health care price inflation, 

likely resulting in relatively little uncertainty in the amount of future health 

care cost growth caused by health care price inflation. Health care prices 

have been increasing steadily between 3 and 5 percent annually in recent 

decades. While some factors, such as consolidation of providers and 

integration of provider types, can reinforce price inflation, insurance plan 

types and insurance models have also been evolving to incorporate new 

methods of restraining health care cost growth. The trend of shifting 

toward more capitated payment,55 rather than fee-for-service, may 

continue as new capitated payment models are introduced and more 

beneficiaries switch to managed care health plans. In addition, the 

introduction of groups of providers organized into accountable care 

organizations may also restrain health care cost growth through payment 

models designed to promote quality care and coordinate care.56

Increases in administrative expenses: While it is difficult to assess the 

uncertainty associated with administrative expenses, it is clear that 

administrative expenses represent a relatively small portion of overall 

health care spending, and thus are likely to impose a relatively small 

amount of uncertainty on health care cost projections. The largest nearterm change in administrative expenses is likely to be from increased use 

of electronic medical records, which may have large initial implementation 

costs, but also may decrease administrative expenses over the long-term.

Aging: Similar to population growth, the aging of the U.S. population is 

relatively predictable; therefore, aging is not likely to produce much 

uncertainty for long-term health care projections. Changes in the age 

profile of the United States may affect health costs per capita through 

relatively unlikely events such as a pandemic or other catastrophic event, 

 

55Capitated payments reimburse providers for the cost of health care services for a 

particular patient over a period of time. Payments are generally based on a diagnosis or 

treatment and are often adjusted to account for the health status of the patient.

56Accountable care organizations are made up of groups of providers and suppliers that 

join together with the goal of reducing costs by improving the quality and efficiency of 

health care delivered to beneficiaries.
Page 40 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

or a major technological breakthrough that significantly affects life 

expectancy.

Changes in the amount of defensive medicine: Because it is difficult to 

separate health care services provided due to defensive medicine from 

those that would have been otherwise provided, it may be also somewhat 

difficult to affect change on the influence of these factors on health care 

spending. There are legislative proposals to limit the ability of individuals 

to bring medical malpractice actions, which are designed to limit 

defensive medicine spending; however, the uncertainty associated with 

health care spending due to these factors is likely to be small.

Changes in the amount of supplier-induced demand: It is also difficult 

to identify services provided due to supplier-induced demand, and 

therefore difficult to estimate the uncertainty associated with supplierinduced demand. However, some changes in supplier-induced demand 

may impact future health care cost growth. For example, PPACA’s 

limiting of the expansion of physician-owned hospitals,57 and increased 

use of prospective and bundled payments may improve productivity and 

limit supplier-induced demand because the payment structure gives 

providers an incentive to find ways to treat patients more efficiently.58

Increases in direct-to-consumer advertising and consumer 

information: Uncertainty associated with increases in direct-to-consumer 

advertising and consumer information is relatively unknown as the 

phenomenon is quite new and its impact on future health care cost growth 

depends on many factors, including advertising regulations and physician 

attitudes toward patient requests.

Comparing the results of our simulations before and after the enactment 

of PPACA helps to illustrate the important role that efforts to slow the 

growth in health care spending have in improving the long-term fiscal 

 

57In order to continue to qualify for an exception to the federal statutory prohibition on 

physician self-referrals, most physician-owned hospitals must meet new criteria 

established under PPACA, including a prohibition on expanding facility capacity beyond 

2010 levels.

58Bundled payments, or episode-based payments, are payments for an entire episode of 

services, which incorporate the often reduced cost for services provided in the same

episode of care, compared to the cost of providing each service in separate episodes.

Concluding 

Observations 
Page 41 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

outlook. These efforts will require a sustained commitment and 

understanding of the key factors affecting health care cost and how they 

interrelate. Reducing health care cost growth alone, however, is not 

sufficient to put the federal budget on a sustainable path. Even in 

simulations assuming health care cost growth can be constrained for an 

extended period, our simulations show debt held by the public rising as a 

share of GDP over time, particularly assuming historical trends and policy 

preferences for revenue and other spending continue. Therefore, more 

needs to be done to change the fiscal path. This will likely require difficult 

decisions about both federal spending and revenue.

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 19 days from the 

report date. At that time, we will send copies of this report to interested 

congressional committees and other interested parties. We will also make 

copies available at no charge on the GAO website at http://www.gao.gov. 
Page 42 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

If you or your staff have any questions about this report, please contact 

Susan J. Irving at (202) 512-6806 or irvings@gao.gov, or James C. 

Cosgrove at (202) 512-7114 or cosgrovej@gao.gov. Contact points for 

our Offices of Congressional Relations and Public Affairs may be found 

on the last page of this report. GAO staff who made major contributions to 

this report are listed in appendix III.

Sincerely yours,

Susan J. Irving

Director for Federal Budget Analysis

Strategic Issues

James C. Cosgrove

Director

Health Care
Appendix I: Key Assumptions and Technical 

Changes in Our Federal Simulations for this 

Report

Page 43 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

We run two simulations showing federal deficits and debt under different 

sets of policy assumptions. Our Baseline Extended simulation illustrates 

the long-term outlook assuming current law is generally continued, while 

the Alternative simulation illustrates the long-term outlook assuming 

historical trends and policy preferences are continued.

In the Baseline Extended simulation, we closely follow the Congressional 

Budget Office’s (CBO) 10-year baseline budget projections, which 

incorporate the assumption that current law remains in effect. Revenue 

and spending other than interest on the debt and large mandatory 

programs such as Social Security and Medicare are then held constant as 

a share of gross domestic product (GDP). Under current law, revenue as 

a share of GDP would increase over time because of several factors, 

including the expiration of tax provisions; “real bracket creep,” wherein the 

growth of real income causes a greater proportion of taxpayers’ income to 

be taxed in higher brackets and be subject to the alternative minimum tax 

(AMT); and increased retirement income subject to taxation upon 

withdrawal (i.e., deferred taxes). However, history suggests that 

legislation will be enacted to offset such increases in revenue. In the 

Alternative simulation, expiring tax provisions are extended and the AMT 

exemption amount is indexed to inflation in the near term. Discretionary 

spending in the Alternative simulation grows with the economy in the first 

10 years unless specific limits are specified in law. Over the long term, 

discretionary spending and revenue are held constant at or near their 40-

year historical average share of GDP.

Long-term spending on Social Security and Medicare in the Baseline 

Extended simulation is based on the Social Security and Medicare 

Trustees (Trustees) intermediate projections, which follow current law. 

Spending on Medicare in the Alternative simulation for all years is based 

on the Centers for Medicare & Medicaid Services’ Office of the Actuary’s 

(OACT) illustrative alternative projections, which deviate from current law. 

In these projections, for example, Medicare physician payment rate 

updates are adjusted to reflect the fact that in most years, Congress has 

acted to override reductions that would occur under current law. In both 

simulations, we assume that Social Security and Medicare benefits will 

continue to be paid even after the Federal Old-Age and Survivors 

Insurance and Federal Disability Insurance trust funds and the Federal 

Hospital Insurance and Federal Supplementary Medical Insurance trust 

funds are exhausted.

Outlays for Medicaid, the Children’s Health Insurance Program (CHIP), 

and federal exchange subsidies are based on CBO’s most recent 10-year 

Appendix I: Key Assumptions and Technical 

Changes in Our Federal Simulations for this 

Report 
Appendix I: Key Assumptions and Technical 

Changes in Our Federal Simulations for this 

Report

Page 44 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

baseline in both of the simulations. Thereafter, growth in spending in our 

Baseline Extended simulations is consistent with CBO’s most recent longterm assumptions for the number and age composition of enrollees and

the Medicare Trustees’ intermediate assumptions for excess cost growth. 

The excess cost growth assumption in our January 2010 Alternative 

simulation is also consistent with the Trustees’ intermediate assumptions. 

In our Fall 2010 Alternative simulation, excess cost growth is consistent 

with OACT’s alternative scenario.

We regularly update these simulations as new data from CBO, the 

Trustees, and OACT become available. In recent years, we have updated 

our simulations twice a year: in the spring and in the fall. With each 

update, we also revisit the assumptions used in our model and update 

them to reflect legislative or technical changes, as needed. For example, 

after the enactment of the Patient Protection and Affordable Care Act 

(PPACA), consistent with CBO, we included federal spending for CHIP 

and federal exchange subsidies in the same category with Medicaid.

To facilitate comparisons between different sets of simulations over time, 

we made technical changes to our January 2010 and Fall 2010 

simulations. The key changes are described below.

1. GDP in our January 2010 and Fall 2010 simulations was originally 

determined by growth in the labor force, capital stock, and total factor 

productivity after the first 10 years, and projections of Social Security 

spending were adjusted accordingly. Beginning with the Fall 2011 

update, our GDP growth assumption was changed to match the 

Trustees’ intermediate assumptions over the long term.1

 

1

GAO, The Federal Government’s Long-Term Fiscal Outlook: Fall 2011 Update, 

This GDP 

growth assumption is more consistent with the growth in labor force, 

wages, and other factors underlying the Trustees’ Social Security and 

Medicare projections used in our simulations. We revised the GDP 

assumption in our January 2010 and Fall 2010 simulations to be 

consistent with this approach. Specifically, in this report, real GDP 

growth in the January 2010 and Fall 2010 simulations is based on the 

Trustees’ 2009 and 2010 reports, respectively, and averages 2.1 

percent over the long term in both sets of simulations. This is up from 

the average of 1.9 percent in our original January 2010 simulations 

GAO-12-28SP (Washington, D.C.: Oct. 24, 2011).
Appendix I: Key Assumptions and Technical 

Changes in Our Federal Simulations for this 

Report

Page 45 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

and the same average real GDP growth in the original Fall 2010 

simulations.

2. Prior to our Fall 2011 update, we adjusted the Trustees’ intermediate 

projections for Social Security spending in our simulations to reflect 

wage growth implied in our simulations. After we made the change to 

our GDP assumption described above, it was no longer necessary to 

make adjustments to the Trustees’ Social Security projections. 

Therefore, in this report, Social Security spending in the January 2010 

and Fall 2010 simulations is based on the Trustees’ 2009 and 2010 

intermediate projections, respectively, without any additional 

adjustments.

3. In prior updates, our excess cost growth assumption, while based on 

growth for the U.S. health sector as a whole, was affected by 

productivity adjustments and other cost-containment mechanisms for 

Medicare. Beginning with our Fall 2012 update, we removed the 

effects of productivity adjustments and other cost-containment 

mechanisms for Medicare from our estimates of excess cost growth 

for Medicaid, CHIP, and exchange subsidies. We made similar 

changes to excess cost growth in our January 2010 and Fall 2010 

simulations. In the revised January 2010 and Fall 2010 simulations 

used in this report, excess cost growth for Medicaid, CHIP, and 

exchange subsidies averages 0.8 percentage points per year over the 

long term in both the Baseline Extended and Alternative simulations. 

This is roughly the same as the assumption used in the original 

January 2010 Baseline Extended and Alternative simulations and the 

original Fall 2010 Alternative simulation and a small increase from the 

assumption used in the original Fall 2010 Baseline Extended 

simulation that averaged 0.7 percentage points per year.

Together these changes reduced the deficit by 0.9 percentage points of 

GDP in 2050 in our January 2010 Baseline Extended simulation and 1.3 

percentage points in our January 2010 Alternative simulation. They also 

reduced the deficit by 0.2 percentage points of GDP in 2050 in our Fall 

2010 Baseline Extended simulation. These changes did not affect the 

size of the deficit in 2050 in our Fall 2010 Alternative simulation. Because 

of these changes, the assumptions and results of the simulations in this 

report differ slightly from those originally published in 2010.

Tables 1 and 2 list the key budget assumptions underlying the January 

2010 and Fall 2010 Baseline Extended and Alternative simulations used 

in this report.
Appendix I: Key Assumptions and Technical 

Changes in Our Federal Simulations for this 

Report

Page 46 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Table 1: Key Budget Assumptions Underlying the Baseline Extended Simulations 

Model inputs January 2010 Fall 2010

Revenue CBO’s January 2010 baseline that assumes tax cuts 

will expire as scheduled under current law and that an 

increasing share of taxpayers will be subject to higher 

tax rates through 2020; thereafter remains constant at 

20.2 percent of GDP (CBO’s projection in 2020)

CBO’s August 2010 baseline that assumes tax cuts 

will expire as scheduled under current law and that 

an increasing share of taxpayers will be subject to 

higher tax rates through 2020; thereafter remains 

constant at 21.0 percent of GDP (CBO’s projection 

in 2020)

Social Security

spending

CBO’s January 2010 baseline through 2020; thereafter 

phases into the 2009 Social Security Trustees’ 

intermediate projections

CBO’s August 2010 baseline through 2020; 

thereafter phases into the 2010 Social Security 

Trustees’ intermediate projections

Medicare

spending

CBO’s January 2010 baseline through 2020 that 

assumes cuts in physician fees will occur as scheduled 

under current law; thereafter 2009 Medicare Trustees’ 

intermediate projections

CBO’s August 2010 baseline through 2020 that 

assumes cuts in physician fees will occur as 

scheduled under current law; thereafter 2010 

Medicare Trustees’ intermediate projections that 

assumes full implementation and effectiveness of 

cost-containment provisions enacted in PPACA 

Medicaid, CHIP, and 

exchange subsidies

spending

CBO’s January 2010 baseline through 2020; thereafter 

growth in spending for these programs is consistent 

with CBO’s June 2009 long-term assumptions for the 

number and age composition of enrollees and the 

2009 Medicare Trustees’ intermediate assumptions for 

excess cost growth

a

CBO’s August 2010 baseline through 2020; 

thereafter growth in spending for these programs is 

consistent with CBO’s June 2010 long-term 

assumptions for the number and age composition of 

enrollees and the 2010 Medicare Trustees’ 

intermediate assumptions for excess cost growth

Other mandatory

spending

CBO’s January 2010 baseline through 2020; thereafter 

remains constant as a share of GDP at 2.2 percent of 

GDP (implied by CBO’s projection in 2020)

CBO’s August 2010 baseline through 2020; 

thereafter remains constant as a share of GDP at 

2.3 percent of GDP (implied by CBO’s projection in 

2020)

Discretionary

spending

CBO’s January 2010 baseline through 2020; thereafter 

remains constant at 6.7 percent of GDP (CBO’s 

projection in 2020)

CBO’s August 2010 baseline through 2020; 

thereafter remains constant at 7.0 percent of GDP 

(CBO’s projection in 2020)

Source: GAO analysis.

Notes: CBO’s projections are from The Budget and Economic Outlook: Fiscal Years 2010 to 2020

(January 2010), The Long-Term Budget Outlook (June 2009), The Budget and Economic Outlook: An 

Update (August 2010) and The Long-Term Budget Outlook (June 2010). The Trustees’ projections 

are from The 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors 

Insurance and Federal Disability Insurance Trust Funds (May 2009), 2009 Annual Report of the 

Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance 

Trust Funds (May 2009), The 2010 Annual Report of the Board of Trustees of the Federal Old-Age 

and Survivors Insurance and Federal Disability Insurance Trust Funds (August 2010) and The 2010 

Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal 

Supplementary Medical Insurance Trust Funds (August 2010). We assume that Social Security and 

Medicare benefits are paid in full regardless of the amounts available in the trust funds.

a

Starting with Fall 2010 update, we include federal spending for CHIP and federal exchange subsidies 

in the same category with Medicaid.
Appendix I: Key Assumptions and Technical 

Changes in Our Federal Simulations for this 

Report

Page 47 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Table 2: Key Budget Assumptions Underlying the Alternative Simulations 

Model inputs January 2010 Fall 2010

Revenue CBO’s estimates assuming expiring tax provisions 

are extended through 2020 and the 2009 AMT 

exemption amount is indexed to inflation for years 

2010 to 2020; thereafter is phased into the 40-year 

historical average of 18.1 percent of GDP

CBO’s estimates assuming expiring tax provisions 

are extended through 2020 and the 2009 AMT 

exemption amount is indexed to inflation for years 

2010 to 2020; thereafter is phased into the 40-year 

historical average of 18.1 percent of GDP

Social Security

spending

CBO’s January 2010 baseline through 2020; 

thereafter phases into the 2009 Social Security 

Trustees’ intermediate projections

CBO’s August 2010 baseline through 2020; 

thereafter phases into the 2010 Social Security 

Trustees’ intermediate projections

Medicare

spending

Based on OACT’s alternative scenario that assumes 

physician fees will remain at current levels (i.e., a 

physician fee schedule update of 0 percent) instead 

of being reduced as scheduled under current law

Based on OACT’s alternative scenario that assumes 

that physician payment rates grow with inflation 

(using the Medicare Economic Index) beginning in 

2010 a a

Medicaid, CHIP, and

exchange subsidies

spending

and policies enacted in PPACA that would 

restrain spending growth begin to phase out after 

2019

CBO’s January 2010 baseline through 2020; 

thereafter CBO’s June 2009 long-term projections 

adjusted to reflect excess cost growth consistent with 

the 2009 Medicare Trustees’ intermediate projections

b

CBO’s August 2010 baseline through 2020; 

thereafter CBO’s June 2010 projections adjusted to 

reflect excess cost growth consistent with OACT’s 

alternative scenario and CBO’s assumption that a 

policy that would slow the growth of subsidies for 

health insurance coverage is not in effect

Other mandatory

spending

Baseline Extended adjusted for extension of certain 

tax credits through 2020; thereafter is phased back to 

2.2 percent of GDP by 2025 (same as Baseline 

Extended)

Baseline Extended adjusted for extension of certain 

tax credits through 2020; thereafter is phased back 

to 2.3 percent of GDP by 2025 (same as Baseline 

Extended)

Discretionary

spending

Discretionary spending other than American 

Recovery and Reinvestment Act spending grows with 

GDP after 2010 (i.e., remains constant at 8.7 percent 

of GDP); American Recovery and Reinvestment Act 

provisions are included but assumed to be temporary

Discretionary spending other than American 

Recovery and Reinvestment Act spending grows 

with GDP after 2010 (i.e., remains constant at 8.6 

percent of GDP); American Recovery and 

Reinvestment Act provisions are included but 

assumed to be temporary

Source: GAO analysis.

Notes: CBO’s projections are from The Budget and Economic Outlook: Fiscal Years 2010 to 2020

(January 2010), The Long-Term Budget Outlook (June 2009), The Budget and Economic Outlook: An 

Update (August 2010) and The Long-Term Budget Outlook (June 2010). The Trustees’ projections 

are from The 2009 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors 

Insurance and Federal Disability Insurance Trust Funds (May 2009), 2009 Annual Report of the 

Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance 

Trust Funds (May 2009), The 2010 Annual Report of the Board of Trustees of the Federal Old-Age 

and Survivors Insurance and Federal Disability Insurance Trust Funds (August 2010) and The 2010 

Annual Report of the Boards of Trustees of the Federal Hospital Insurance and Federal 

Supplementary Medical Insurance Trust Funds (August 2010). OACT’s projections are based on 

Projected Medicare Part B Expenditures under Two Illustrative Scenarios with Alternative Physician 

Payment Updates (May 2009) and Projected Medicare Expenditures under an Illustrative Scenario 

with Alternative Payment Updates to Medicare Providers (August 2010). We assume that Social 

Security and Medicare benefits are paid in full regardless of the amounts available in the trust funds.

a

Since 2003, Congress has taken a series of legislative actions to prevent scheduled reductions in 

physician payment rates that would otherwise occur under law.
Appendix I: Key Assumptions and Technical 

Changes in Our Federal Simulations for this 

Report

Page 48 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

b

Starting with Fall 2010 update, we include federal spending for CHIP and subsidies for the newly 

created health insurance exchanges in the same category with Medicaid.

Through 2020, GDP grows at the rates underlying CBO’s most recent 

baseline estimates at the time the simulations were run. Thereafter, we 

follow the intermediate estimates from the most recent Trustees’ report at 

the time the simulations were run. These estimates are consistent with 

the growth in labor force, wages, and other factors underlying the 

estimates for Social Security and Medicare spending in our simulations. 

GDP is held constant across simulations and does not respond to 

changes in fiscal policy.

The interest rate on federal debt is held constant even when deficits climb 

and the national saving rate plummets. Under such conditions, there 

could be a rise in the rate of interest and a more rapid increase in federal 

interest payments than our simulations display. Sensitivity analyses 

reveal that variations in these assumptions generally would not affect the 

relative outcomes of alternative policies.

The key economic assumptions in the simulations in this report are shown 

in table 3.

Table 3: Key Economic Assumptions Underlying the Long-Term Federal Simulations

Model inputs January 2010 Fall 2010

Real GDP growth CBO January 2010 baseline through 2020; thereafter 

averages 2.1 percent based on the intermediate 

assumptions of the 2009 Social Security and 

Medicare Trustees’ reports

CBO August 2010 baseline through 2020; thereafter 

averages 2.1 percent based on the intermediate 

assumptions of the 2010 Social Security and 

Medicare Trustees’ reports

Inflation (percentage 

change in GDP price 

index) 

CBO January 2010 baseline through 2020; 1.8 

percent thereafter (CBO’s projection in 2020) 

CBO August 2010 baseline through 2020; 1.8 

percent thereafter (CBO’s projection in 2020) 

Interest rate (on debt 

held by the public) 

Rate implied by CBO’s January 2010 baseline net 

interest payment projections through 2020; 5.0 

percent thereafter (the rate implied in 2020) 

Rate implied by CBO’s August 2010 baseline net 

interest payment projections through 2020; 5.1 

percent thereafter (the rate implied in 2020) 

Source: GAO

Economic Assumptions
Appendix II: Changes in the Long-Term Fiscal 

Outlook since 2010

Page 49 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Overall, the federal government’s long-term fiscal outlook has improved 

since 2010 based in part on laws enacted after PPACA, including the 

Budget Control Act of 2011. (See fig. 10.) The provisions of the Budget 

Control Act primarily affected discretionary spending, and under both of 

our simulations, discretionary spending as a share of the economy would 

be lower in 2022 than at any point in the last 50 years. The Budget 

Control Act’s automatic enforcement procedures would reduce Medicare 

spending by up to 2 percent under current law. Many other mandatory 

programs, including Medicaid, are exempt from the spending reductions. 

Our Fall 2012 simulations show that health care spending remains a key 

driver of the federal government’s long-term fiscal imbalance. Under the 

Fall 2012 Alternative simulation, spending for Medicare, Medicaid, CHIP, 

and federal exchange subsidies almost doubles as a share of GDP by 

2035.

Figure 10: Comparison of Debt Held by the Public in Our January 2010, Fall 2010, and Fall 2012 Simulations

Appendix II: Changes in the Long-Term Fiscal 

Outlook since 2010
Appendix II: Changes in the Long-Term Fiscal 

Outlook since 2010

Page 50 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

The results of our more recent Fall 2012 simulations for spending on

Medicaid, CHIP and exchange subsidies do not differ significantly from 

the results from the Fall 2010 simulations that were run not long after the 

enactment of PPACA. Our most recent simulations published in Fall 2012 

incorporate CBO’s and the Joint Committee on Taxation’s revised 

estimates through 2022 for the coverage provisions following the 

Supreme Court’s ruling. Spending on Medicaid, CHIP, and federal 

exchange subsidies is not significantly different from those in our Fall 

2010 simulations in part because the reduction in federal matching funds 

associated with covering fewer individuals in state Medicaid programs is 

partially offset by increased costs of the federal exchange subsidies as a 

result of larger numbers of low-income individuals enrolling in exchange 

plans.

Medicare spending is slightly higher in our most recent Baseline 

Extended simulation due to technical refinements the Medicare Trustees 

made in response to recommendations by the 2010-2011 Technical 

Review Panel on the Medicare Trustees Report; they were not directly 

related to PPACA.1

The key budget assumptions in our Fall 2012 simulations are shown in 

table 4.

In our most recent Alternative simulation, Medicare 

spending is slightly lower than it was in our Fall 2010 Alternative 

simulation due to a change in the OACT’s assumption for physician 

payment updates in their alternative projections; this change was also 

unrelated to PPACA.

 

1

The 2010-2011 Technical Review Panel recommended a new approach for developing 

long-range projections that incorporates a more refined analysis of Medicare versus nonMedicare payment rate updates. As a result, the pre-PPACA “baseline” cost growth in the 

2012 Trustees Report is now assumed to be “GDP plus 1.4 percent”—or 0.4 percent 

faster than the previous growth assumption of “GDP plus 1 percent.” 
Appendix II: Changes in the Long-Term Fiscal 

Outlook since 2010

Page 51 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Table 4: Key Budget Assumptions Underlying the Fall 2012 Simulations

Model inputs Baseline Extended simulation Alternative simulation

Revenue CBO’s August 2012 baseline that assumes tax cuts 

will expire as scheduled under current law and that 

an increasing share of taxpayers will be subject to 

higher tax rates through 2022; thereafter remains 

constant at 21.4 percent of GDP (CBO’s projection in 

2022)

CBO’s estimates that assume expiring tax 

provisions other than the temporary Social Security 

payroll tax reduction are extended through 2022, 

and the 2011 AMT exemption amount is indexed to 

inflation for years 2012 to 2022; thereafter is 

phased into the 40-year historical average of 17.9 

percent of GDP 

Social Security

spending

CBO’s August 2012 baseline through 2022; 

thereafter phases into the 2012 Social Security 

Trustees’ intermediate projections

Same as Baseline Extended

Medicare

spending

CBO’s August 2012 baseline through 2022 that 

assumes cuts in physician payment rates will occur 

as scheduled under current lawa at the time and that 

the implementation of the Budget Control Act’s 

automatic enforcement procedures reduces 

spending;b thereafter phases into the 2012 Medicare 

Trustees’ intermediate projections in which cost 

containment mechanisms reduce excess cost growth 

to 0.2 percentage points on average between 2023 

and 2086

Based on OACT’s alternative scenario that 

assumes physician payment rates grow by 1 

percent annually through 2022

c 

a and then gradually 

transition to a long-term growth rate equal to the per 

capita increase in overall health spending; spending 

reductions under the Budget Control Act do not 

occurb and policies that would restrain spending 

growth are applied fully through 2019 but begin to 

phase out thereafter; excess cost growth averages 

0.8 percentage points between 2023 and 2086c

Medicaid, CHIP, and 

exchange subsidies

spending

 

CBO’s August 2012 baseline through 2022; 

thereafter growth in spending for these programs is 

consistent with CBO’s June 2012 long-term 

assumptions for the number and age composition of 

enrollees and the 2012 Medicare Trustees’ 

intermediate assumptions for excess cost growth; 

excess cost growth averages 0.8 percentage points 

between 2023 and 2086

CBO’s August 2012 baseline through 2022; 

thereafter growth in spending for these programs is 

consistent with CBO’s June 2012 long-term 

assumptions for the number and age composition of 

enrollees and CBO’s alternative assumption that a 

policy that would slow the growth of per-participant 

subsidies for health insurance coverage is not in 

effect and eligibility thresholds are modified to 

maintain the share of the population eligible for 

subsidies; as in Baseline Extended, excess cost 

growth averages 0.8 percentage points between 

2023 and 2086

c

c

Other mandatory

spending

 

CBO’s August 2012 baseline through 2022, which 

incorporates the reductions in spending scheduled to 

occur under the Budget Control Act’s automatic 

enforcement procedures;b

CBO’s August 2012 baseline adjusted for extension 

of certain tax credits and to exclude the effects of 

the Budget Control Act’s automatic enforcement 

thereafter remains procedures through 2022

constant as a share of GDP at 2.4 percent of GDP 

(implied by CBO’s projection in 2022)

b

Discretionary

spending

thereafter is phased back 

to 2.4 percent of GDP (same as Baseline Extended) 

by 2025

CBO’s August 2012 baseline through 2022, which 

reflects the original caps set by the Budget Control 

Act, as well as the lower caps triggered by the 

automatic enforcement procedures;b

Follows the original caps set by the Budget Control 

Act but not the lower caps triggered by the 

automatic enforcement procedures;

thereafter 

remains constant at 5.6 percent of GDP (CBO’s 

projection in 2022)

b

Source: GAO.

after 2022 it 

gradually phases up to 7.5 percent of GDP (the 20-

year historical average)

Notes: CBO’s projections are from An Update to the Budget and Economic Outlook: Fiscal Years 

2012 to 2022 (August 2012) and The 2012 Long-Term Budget Outlook (June 2012). The Trustees 

projections are from The 2012 Annual Report of the Board of Trustees of the Federal Old-Age and
Appendix II: Changes in the Long-Term Fiscal 

Outlook since 2010

Page 52 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Survivors Insurance and Federal Disability Insurance Trust Funds and The 2012 Annual Report of the 

Boards of Trustees of the Federal Hospital Insurance and Federal Supplementary Medical Insurance 

Trust Funds, which were both issued on April 23, 2012. OACT’s projections are based on Projected 

Medicare Expenditures under Illustrative Scenarios with Alternative Payment Updates to Medicare 

Providers (May 18, 2012). We assume that Social Security and Medicare benefits are paid in full 

regardless of the amounts available in the trust funds.

a

At the time, physician payment rates were scheduled to be reduced by roughly 27 percent at the 

start of 2013. Since 2003, Congress has taken a series of legislative actions to override scheduled 

reductions in physician payment rates that would otherwise occur under law. Physician fee updates

set by Congress have averaged 0.9 percent per year over this period.

b

The Budget Control Act established limits on discretionary budget authority for 2012 through 2021. It 

also specified additional limits on discretionary spending and automatic reductions in mandatory 

spending, including Medicare, that begin to take effect in January 2013 and are intended to further 

reduce projected deficits by an additional $1.2 trillion.

c

The key economic assumptions in our Fall 2012 simulations are shown in 

table 5.

Excess cost growth refers to the annual growth rate of health care spending per enrollee in excess of 

the annual growth rate of potential GDP, adjusted for demographic characteristics.

Table 5: Key Economic Assumptions Underlying the Fall 2012 Long-Term Simulations

Model inputs All simulations

Real GDP growth CBO’s August 2012 baseline through 2022; thereafter averages 2.1 percent based on 

the intermediate assumptions of the 2012 Social Security and Medicare Trustees’ 

Reports

Inflation (percentage change in GDP 

price index)

CBO’s August 2012 baseline through 2022; 2 percent thereafter (CBO’s projection in 

2022) 

Interest rate (on debt held by the public) Rate implied by CBO’s August 2012 baseline net interest payment projections through 

2022; phasing to 5.2 percent in 2025 and then constant thereafter (based on CBO’s 

June 2012 long-term projection) 

Source: GAO.
Appendix III: GAO Contacts and Staff 

Acknowledgments

Page 53 GAO-13-281 PPACA and the Long-Term Fiscal Outlook

Susan J. Irving, (202) 512-6806 or irvings@gao.gov

James C. Cosgrove, (202) 512-7114 or cosgrovej@gao.gov

In addition to the contacts named above, Melissa Wolf (Assistant 

Director), Andrew Johnson, Richard Krashevski, Thomas McCabe, 

Thomas McCool, Michael O’Neill, Albert Sim, and Phyllis Thorburn made 

key contributions to this report. Robert Robinson assisted with the 

graphics.

Appendix III: GAO Contacts and Staff 

Acknowledgments 

GAO Contacts 

Staff 

Acknowledgments 

(450994)
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