EXECUTIVE OFFICE OF THE PRESIDENT

COUNCIL OF ECONOMIC ADVISERS

THE ECONOMIC CASE FOR HEALTH CARE REFORM: 

UPDATE

DECEMBER 14, 2009
1

THE ECONOMIC CASE FOR HEALTH CARE REFORM: UPDATE

Over the past several months, the Council of Economic Advisers (CEA) has released a series of 

reports analyzing the impact of reform-induced expansions in health insurance coverage and 

reductions in the growth of health care spending.1In this update to our June report on the 

Economic Case for Health Care Reform, the CEA reviews the case for reform that genuinely 

reduces the growth rate of health care costs, and presents new findings on the economic impact 

of recent Congressional proposals.

The necessity of slowing the growth rate of health care costs is uncontroversial, as families, 

businesses, and governments at every level are struggling to cope with rapidly increasing health 

care costs. Each year, a larger share of workers‘ total compensation and of Medicare recipients‘ 

Social Security benefits is eaten up by insurance premiums. Each year, fewer businesses, and 

especially small businesses, can afford to offer health insurance to their workers. And each year, 

a larger share of spending at all levels of government goes to health care, which has led to tax 

increases, cuts in other programs, and higher budget deficits. 

Since the release of the three CEA reports earlier this year, both the House and the Senate have 

made substantial progress toward passing comprehensive health reform legislation. Last month, 

the House passed the Affordable Health Care for America Act of 2009, and the Senate is 

currently debating the Patient Protection and Affordable Care Act. According to projections by 

the non-partisan Congressional Budget Office (CBO), both bills would provide a new measure of 

security and stability to those with insurance and extend health insurance coverage to more than 

thirty million individuals who would otherwise be uninsured. The bills would also significantly 

lower the Federal budget deficit in the upcoming decade, and extend the solvency of the 

Medicare Trust Fund by five years.2

This report presents new estimates that the Congressional proposals will reduce the growth of 

health care costs for individuals, businesses, and the government, and reviews the economic case 

for health care reform. Some of the many benefits discussed below include higher standards of 

living for workers, more private sector job creation, and lower government budget deficits. 

 

1

Executive Office of the President. Council of Economic Advisers. ―The Economic Case for Health Care Reform.‖ 

June 2009. http://www.whitehouse.gov/administration/eop/cea/TheEconomicCaseforHealthCareReform/

―The Economic Effects of Health Care Reform on Small Businesses and Their Employees.‖ July 25, 2009. 

http://www.whitehouse.gov/administration/eop/cea/Health-Care-Reform-and-Small-Businesses. 

―The Impact of Health Insurance Reform on State and Local Governments.‖ September 15, 2009. 

http://www.whitehouse.gov/assets/documents/cea-statelocal-sept15-final.pdf. 

2

 A recently released report from the Actuary of the Centers for Medicare and Medicaid Services suggests that the 

Senate bill will extend the solvency of the trust fund by 9 years. Centers for Medicare and Medicaid Services. Office 

of the Actuary. ―Estimated Financial Effects of the  ̳Patient Protection and Affordable Care Act of 2009.‘‖

December 10, 2009. 
2

I. HEALTH INSURANCE REFORM: WILL IT CONTROL FEDERAL HEALTH CARE SPENDING? 

The President has made clear his support for health reform legislation that genuinely slows the 

growth rate of costs. As the Senate continues debate on its own version of health insurance 

reform legislation, the CEA has been investigating whether and to what extent that bill reduces 

the growth rate of health care spending in government programs and in the economy as a whole. 

To do this, we have analyzed data on projected Federal spending on Medicare and Medicaid 

from the CBO in each year through 2019, and combined it with data from the CBO‘s most recent 

estimates of the impact of the Senate bill. 

Our findings for Medicare and Medicaid indicate that, while combined Federal spending on these

two programs will initially increase (as eligibility for the Medicaid program expands), the 

Senate‘s bill will lead to a substantial reduction in the growth rate of this spending over time. 

These findings are consistent with the CBO score of the Senate legislation, which finds that 

―Medicare spending under the bill would increase at an average annual rate of around 6 percent 

during the next two decades -- well below the roughly 8 percent annual growth rate of the past 

two decades.‖3 More specifically, we find that: 

By 2019, total Federal spending on the Medicare and Medicaid programs will be 

lower than it would have been absent reform. These long-run savings are achieved 

through a reduction in wasteful spending, fraud, inefficiencies and abuse in both 

programs, along with a combination of delivery system reforms that gives providers an 

incentive to deliver high quality and efficient medical care rather than costly, inefficient 

care with little or no impact on quality or health. 

From 2016 to 2019, the annual growth rate of Federal spending on these two 

programs will be at least 0.7 percentage point lower than it otherwise would have 

been.4

 CBO estimates suggest that the magnitude of these growth rate reductions will 

increase in the subsequent decade, which will substantially improve the long-term 

Federal budget outlook. 

These reductions will also help lower the growth rate of Medicare recipients’ Part B 

premiums, which more than doubled from 2000 to 2008 and grew three times faster than 

did average Social Security benefits during the same period.5

 

3 Congressional Budget Office. Letter to the Honorable Harry Reid. ―Patient Protection and Affordable Care Act: 

Cost estimate for the amendment in the nature of a substitute to H.R. 3590.‖ November 18, 2009. See Appendix B 

for details on Medicare and Medicaid calculations. 

4

 We focus on 2016 to 2019 for two reasons. First, the CBO budget baseline and detailed analysis of the legislation 

only extends for a ten year budget window, through 2019. See Appendix B for details. Second, while the changes in 

spending from 2011 to 2016 reflect, in part, health insurance expansion, by 2016 most of the major provisions of 

health insurance expansion will be implemented. Changes between 2016 and 2019 primarily reflect the cost saving 

measures of the bill. We therefore view changes in spending from 2016 to 2019 as being informative for predicting 

the effect of health reform on the long term costs of health care spending for the Federal government 

5 Kaiser Family Foundation. ―The Social Security COLA and Medicare Part B Premium.‖ May 2009. Appendix. 

http://www.kff.org/medicare/upload/7912.pdf. 
3

When combined with the other provisions that are in the Senate bill, CBO estimates suggest that 

the Federal budget deficit will be lower by 0.25 percent of GDP in the decade following 2019 

than it otherwise would have been, with the effects growing over the decade.6

It is worth noting that CBO projections in the past have sometimes understated the savings from 

delivery system reforms and revised payment policies such as those included in the Senate bill. 

For instance, actual savings following the Balanced Budget Act (BBA) of 1997, which changed 

the way skilled nursing facilities and home health services were reimbursed under Medicare, 

were 50 percent greater in 1998 and 113 percent greater in 1999 than CBO originally forecast.7

Similarly, spending on the Medicare Part D prescription drug benefit following the Medicare 

Modernization Act of 2003 was about 40 percent less than CBO forecast.8

CBO‘s analysis is generally limited to the Federal budget, and does not attempt to account for 

savings in the health care system more broadly from policies implemented through reform. For 

example, the CBO‘s ―Budget Options, Volume 1: Health Care‖ document found only $19 billion 

in Federal government savings from transitioning toward post-acute bundled payments in 

Medicare. However, recent research published in the New England Journal of Medicine

suggests that bundled payments for chronic diseases and elective surgeries could reduce 

health care spending by as much as 5.4 percent from 2010 to 2019. Even if such savings 

applied to only half of spending in the health care sector, the result would be more than $900 

billion of savings over the decade, according to CEA estimates.9

 If bundled payments were 

expanded beyond post-acute care and even half of the potential savings from bundled payments 

were realized in the Medicare program during the upcoming decade, these savings would 

translate to an additional 0.2 percent per year reduction in program expenditures, or more than 

$190 billion between 2010 and 2019. 

Similarly large reductions in Federal health care expenditures are plausible from the combination 

of other delivery system reforms, including accountable care organizations (a group of primary 

care physicians, specialists, and one or more hospitals that coordinate the care of and accept joint 

responsibility for the quality and cost of care of their group of patients) and incentives to reduce 

hospital-acquired infections. The CBO estimates of the savings from these provisions are 

 

6 Congressional Budget Office. Letter to the Honorable Harry Reid. ―Patient Protection and Affordable Care Act: 

Cost estimate for the amendment in the nature of a substitute to H.R. 3590.‖ November 18, 2009. 

http://www.cbo.gov/ftpdocs/107xx/doc10731/Reid_letter_11_18_09.pdf. 

7 While an underestimate of the BBA‘s impact accounted for a portion of these additional savings, other factors such 

as heightened anti-fraud activities also contributed. See Congressional Budget Office. Statement of Dan L. Crippen, 

Director, Congressional Budget Office. ―Impact of the Balance Budget Act on the Medicare Fee-for-Service 

Program.‖ Statement before the Committee on Commerce, U.S. House of Representatives. September 15, 1999.

http://www.cbo.gov/ftpdocs/15xx/doc1553/091599.pdf.

8

―New Research Finds Congressional Budget Office Has Underestimated Savings and Overestimated Costs from 

Health Policy Changes.‖ The Commonwealth Fund. August 2009.

9

 Hussey, Peter S., Eibner, Christine, Ridgely, M. Susan, McGlynn, Elizabeth A. ―Controlling U.S. Health Care 

Spending – Separating Promising from Unpromising Approaches.‖ New England Journal of Medicine. 2009 361: 

2109-2111. For the $900 billion figure, see data on projected national health care costs from Table 3 of 

http://www.cms.hhs.gov/NationalHealthExpendData/downloads/proj2008.pdf. To estimate total spending for 2019, 

we assume that for 2018-2019, costs will grow at the same rate that they grew for 2017-2018. These estimates 

suggest that total spending from 2010 – 2019 would be more than $35 trillion. 5.4 percent of half of $35 trillion is 

more than $900 billion. 
4

relatively small, which may simply reflect the paucity of evidence of the real-world impact of 

such policies, especially when done in concert and on a national scale. When there are not 

historical examples for the effect of a possible reform, the CBO estimate is often very close to 

zero, despite the potential for significant expenditure reductions from reforms. Savings are also 

plausible from certain features that could spur innovation in cost-saving and qualityimprovements, thereby accelerating the cost savings still further. For instance, health information 

technology adoption could facilitate cost-saving advances in payment methods. Additionally, 

provisions for administrative simplification in reform legislation – which require the 

standardization and streamlining of paperwork and create standards for electronic transaction –

will help cut down on the $23-$31 billion time cost to medical practices of interacting with 

health plans and their administrators.10

Another potentially significant cost saver within the Senate bill is the Independent Medicare 

Advisory Board (IMAB). The IMAB would recommend changes to the Medicare program that 

would both improve the quality of care and also reduce the growth rate of program spending. 

Absent Congressional action, these recommendations would be automatically implemented, 

which would give it much greater authority than the current Medicare Payment Advisory 

Commission (MedPAC). The CBO score of the Senate bill estimates that the IMAB would 

reduce Medicare spending by $23 billion from 2015 to 2019, with the savings likely to continue 

in the subsequent decade. An additional benefit of the IMAB is that it has the potential to 

increase the savings from many of the delivery system reforms described above, which may not 

be fully captured by the CBO estimates for the reasons previously mentioned. 

Taken together, the combination of Medicare- and Medicaid-related provisions in the 

Senate’s Patient Protection and Affordable Care Act are estimated to reduce the annual 

growth rate of Federal spending on both programs by 1.0 percentage point in the upcoming 

decade and by an even greater amount in the subsequent decade. These savings would 

increase national savings and improve the long-run performance of the U.S. economy. 

II. HEALTH INSURANCE REFORM: WILL IT CONTROL PRIVATE HEALTH CARE SPENDING? 

The CBO score makes clear that the Senate‘s Patient Protection and Affordable Care Act will 

relieve significant pressure on the Federal budget in the years ahead. But will it also reduce the 

growth rate of costs in the private sector? An examination of the projected revenues from just 

one provision in the bill – the excise tax on high-cost insurance plans – strongly suggests that the 

answer is yes. This tax will be levied only on the most expensive private sector plans. It will, 

however, provide health insurers with a powerful incentive to reduce their premiums and provide 

a high-value package of benefits. According to estimates from CBO and from the Joint 

Committee on Taxation (JCT), the resulting reduction in premiums will lead employers to pay 

substantially higher wages to affected employees, with this effect growing over time. 

 

10 Casalino, Lawrence P., S. Nicholson, D.N. Gans, T. Hammons, D. Morra, T. Karrison and W. Levinson. ―What 

does it cost physician practices to interact with health insurance plans?‖ Health Affairs, 2009, 28(4): w533-w543. 

http://content.healthaffairs.org/cgi/content/full/28/4/w533. 
5

Using data from CBO and JCT, CEA estimates that the excise tax on high-cost insurance 

plans will reduce the growth rate of annual health care costs in the private sector by 0.5 

percentage point per year from 2012 to 2018.

11 To the extent that insurers in the private sector 

mimic the delivery system reforms that are included in the Senate bill, the reduction in the 

growth rate of costs is likely to be even greater. This is especially true for bundled payments, as 

the potential savings to Medicare from this provision are smaller than in the private sector 

because inpatient care is already largely bundled in Medicare.12 And it is worth noting that the 

transition to bundled, inpatient care generated considerable savings to the program.13

There are several additional sources of savings that would accrue to the private sector as a result 

of the provisions included in the House and Senate bills. For example, the legislation passed by 

the House of Representatives, the Affordable Health Care for America Act, would allow 

individuals without access to affordable coverage and firms with 25 or fewer employees to 

purchase coverage through a competitive, well-regulated marketplace, or exchange, starting in 

2013. By 2015, firms with up to 100 workers could cover their employees through the exchange, 

with even larger firms admitted in subsequent years. Recent estimates by MIT economist 

Jonathan Gruber and by the CBO suggest that this health insurance exchange would lead to 

health insurance coverage that is both more secure and comprehensive, and has lower 

administrative costs and premiums than comparable coverage under current law. Additionally, 

the CBO estimates that premiums would fall by as much as 3 percent for large firms and as much 

as 2 percent for small firms, even before accounting for incentives to curb high-cost policies as a 

result of the excise tax.14

Moreover, the CEA‘s earlier report described waste and inefficiency throughout the health care 

system which could be eliminated without adverse health consequences. Health insurance reform 

legislation is likely to diffuse care delivery reforms throughout the health care system. Public 

investments in patient-centered health research on quality-improving treatments, and in best 

practices such as bundling payments and accountable care organizations, will likely reduce cost 

growth in the private sector. Because hospitals, doctors, and other providers serve publicly and 

privately financed patients alike, the diffusion of efficient, quality-improving practices will lead 

to private sector savings on health care spending as well, amplifying the effectiveness of each 

individual component of reform. 

Taken together, it is likely that the combination of provisions other than the excise tax 

could generate an additional reduction in the growth rate of private sector health care costs 

of 0.5 percentage point. This would imply a total slowing of private-sector cost growth of 

 

11 We start with 2012 because it is just prior to the implementation of the excise tax. We finish in 2018 because that 

is the last year for which CMS provides projections for private health care spending. See Appendix A for details on 

this calculation. 

12 Inpatient care is also frequently bundled in the private sector. However, even if one assumes this is true for all 

private insurers, when one considers that inpatient care accounts for a smaller share of health care spending among 

those with private health insurance than among their counterparts in Medicare, the potential savings from bundled 

payments in the private sector are still considerably larger than in Medicare. 

13 MedPAC June 2008 Report to Congress. 

14 Congressional Budget Office. Letter to the Honorable Evan Bayh. ―An Analysis of Health Insurance Premiums 

Under the Patient Protection and Affordable Care Act.‖ November 30, 2009.

http://www.cbo.gov/doc.cfm?index=10781. 
6

approximately 1.0 percentage point per year. Assuming that all of this slowing of cost growth 

is reflected in private health insurance premiums, an average family policy premium could be 

lower in 2019 by approximately $1000 than it otherwise would have been.15

Recent research by Harvard economist David Cutler and Commonwealth Fund president Karen 

Davis suggests even greater savings from reform. Their estimates imply that a typical family in 

2019 would pay nearly $2,000 less in health insurance premiums than they otherwise would have 

paid. Combining that with lower out-of-pocket costs, total savings would be more than $2,500.16

 

Research by Jonathan Gruber finds that even just a single provision – the excise tax – would 

increase after-tax wages by $234 billion from 2013 to 2019.17

 

The effects discussed so far will slow the growth rate of spending for the health care sector as a 

whole. This slower spending growth will translate into lower costs for businesses and 

individuals, relative to what they otherwise would have been. Importantly, costs for businesses 

and individuals will be reduced further by tax credits that will directly subsidize the cost of 

health insurance. First, the House and Senate bills provide a tax credit that finances up to 50 

percent of the cost of coverage for those small businesses that qualify. Second, the tax credits for 

families and individuals will cap the share of income that individuals pay for their coverage, with 

greater assistance provided to those families with greater need, and put annual limits on out-ofpocket spending. 

III. ECONOMIC BENEFITS OF THE ESTIMATED EFFECTS OF HEALTH INSURANCE REFORM

As outlined in detail in the first CEA report described below, a reduction of this magnitude in the 

growth rate of health care costs would have enormous benefits for governments at every level, 

for employers, for individuals and families, and for the economy as a whole. A few of the many 

benefits of reducing the growth rate of health care costs by an average of 1.0 percentage point 

per year would include: 

GDP that is 4 percent higher by 2030. Reduced health care cost growth will free up 

resources and result in increased national saving and capital formation and output, 

contributing to increased growth of properly measured GDP. In addition, increased 

insurance coverage and resulting improved health care is likely to increase labor supply 

by reducing disability and absenteeism in the workplace, thus increasing GDP further. 

 

15 A family policy with a premium of $12,5000 in 2013 that grew by 7 percent per year through 2019 would cost 

$1,028 more in 2019 than if the same policy grew at 6 percent per year. 

16 Cutler, David M. K Davis, and K. Stremikis. ―Why Health Reform Will Bend the Cost Curve.‖ The 

Commonwealth Fund and The Center for American Progress Action Fund. December 2009. 

17 Gruber, Jonathan. ―Impacts of the Senate High Cost Insurance Excise Tax on Wages: Updated.‖ November 20, 

2009. http://econ-www.mit.edu/files/4895. 
7

0%

2%

4%

6%

8%

10%

12%

14%

16%

2009 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039

Figure 1: Percentage Increase in Properly Measured GDP 

from Slowing the Growth Rate of Health Care Costs by 1 p.p. 

Percent of GDP

Source: CEA calculations.

Median family income that is $6,800 higher by 2030. This increase in the growth rate 

of GDP resulting from slowing the growth rate of health care costs translates into 

substantial increases in the median family income. 

$50,000

$75,000

2009 2012 2015 2018 2021 2024 2027 2030 2033 2036 2039

Slowing cost 

growth by 1.0 p.p.

$100,000

$125,000

$150,000

$175,000

$200,000

Figure 2: Estimated Family Income with and without Health 

Care Reform 

Source: CEA calculations.

Without 

reform

Real 2009 dollars

Federal budget deficit lowered by as much as 2 percent of GDP by 2030. Because the 

Federal government pays for a large fraction of health care through programs such as 
8

Medicare and Medicaid, lowering the growth rate of health care costs by 1 percentage 

point will cause the budget deficit to be much lower than it otherwise would have been. 

In its June report on the Economic Case for Health Care Reform, the CEA calculated that 

a reduction of this scale in the growth rate of health care costs would result in a deficit 

that is lower by 2 percent of GDP by 2030, under the assumption that all such savings 

were used for deficit reduction. The CBO score of the Senate bill – which finds an 

average reduction in the deficit of around 0.25 percent of GDP in the second decade after 

reform – accounts for how the bill uses some of these savings to expand health insurance 

coverage to millions of Americans. The CBO estimate is also rising over that second 

decade. These two differences explain some of the discrepancy between the estimates.

An unemployment rate that is 0.16 percentage point lower and approximately 

320,000 additional jobs. Reducing the growth rate of health care costs will reduce 

growth in firms‘ non-wage compensation costs. As a result, the amount that firms raise 

their prices for a given growth rate of their workers‘ wages is lower—that is, inflation is 

lower. What this means is that, as long as the slower growth of health care costs is not 

fully reflected in workers‘ view of normal wage growth, the economy can operate at a 

lower level of unemployment for a period of time without triggering inflation. 

Along with these benefits to the economy as a whole, there are certain sectors that will benefit 

disproportionately. Most notably and as reported in the second CEA report described below, 

small businesses and their employees would derive a substantial benefit from the Senate bill 

given the high prices that they currently pay, their risk of losing coverage if just one employee 

gets sick, and their lower rates of health insurance coverage. State and local governments would 

also benefit differentially from reform, as outlined in the third CEA report, given that they 

currently finance a very large fraction of uncompensated care to the uninsured and because of the 

enhanced Federal match rates for the reform-induced Medicaid expansion. 

IV. OVERVIEW OF PREVIOUS CEA FINDINGS

In June of 2009, the Council of Economic Advisers (CEA) released a report that summarized the 

most important economic impacts of health care reform. The key findings from this report were 

that reform-induced expansions in health insurance coverage and reductions in the growth of 

health care spending would have enormous benefits for the U.S. economy. As outlined in this 

report and in the discussion above, the key benefits of slowing the growth rate of costs include: 

An improvement in standards of living. Slowing the growth rate of health care costs by 

increasing efficiency will free up resources that can used to produce other things that 

people value. As a result, standards of living will be higher. 

A substantial reduction in the long-run Federal budget deficit. CBO projections 

indicate that total spending accounted for by the Medicare and Medicaid programs would 
9

grow from 6 percent of GDP in 2009 to 15 percent by 2040 in the absence of reform.18

Health care reform that slows the growth rate of spending by increasing the efficiency of 

both programs would help prevent substantial increases in the future Federal budget 

deficit. 

A reduction in the unemployment rate and a corresponding increase in employment.

A slower rate of growth in health care spending would allow the economy to operate at a 

lower level of unemployment for a period of time without triggering inflation. 

As outlined in the report, the key benefits to expansions in health insurance coverage include: 

An improvement in the health and in the economic well-being of individuals who 

would otherwise be uninsured. The uninsured have significantly worse health 

outcomes, including much higher mortality rates, than their insured counterparts. They 

are also at much greater risk of bankruptcy because of their exposure to high out-ofpocket costs. Currently more than one-in-six non-elderly individuals are without health 

insurance and nearly half were uninsured at some point during the past decade. 

An increase in labor supply. Expansions of health insurance coverage would reduce 

absenteeism in the workplace and the prevalence of disabilities. By improving access to 

care, it would also enable more individuals with disabilities who might otherwise be out 

of the labor force to work. These effects would serve to increase economic output and 

reduce the budget deficit. 

A more efficient labor market because of a reduction in “job lock”. One impediment 

that many workers face to changing jobs is that insurers can place restrictions on care for 

the treatment of their or their family members‘ pre-existing conditions. As a result, many 

workers remain ―locked‖ in their current jobs rather than switching to jobs that are a 

better match for their interests and skills. 

In a subsequent report from July of 2009, the CEA highlighted the particular benefits that small 

businesses and their employees would enjoy as a result of health care reform including: 

A reduction in small businesses’ health insurance premiums. Currently, small 

businesses pay up to 18 percent more for the same policy as their counterparts at larger 

firms, largely because of the fixed costs of administering a policy and high brokers‘ fees. 

This high cost acts as a tax on existing small businesses and discourages the creation of 

new small businesses. Lower premiums would allow small businesses to pay higher 

wages, hire more workers, increase investment, or some combination of these. 

An increase in health insurance coverage among small business employees. Workers 

at small businesses are almost three times more likely than workers at large firms to be 

 

18 Congressional Budget Office. The Long-Term Budget Outlook 2009. Data File. Figure 2-1. Total Spending for 

Health Care Under CBO‘s Extended-Baseline Scenario. ―Spending Under the Alternative Fiscal Scenario as a 

Percentage of GDP.‖
10

without health insurance. This reduces the productivity of these workers, further 

disadvantaging small firms in the competitive marketplace. 

An increase in entrepreneurship and in the incentive to work at small businesses. 

Reform-induced expansions in insurance coverage would spur many talented Americans 

to launch their own companies. Furthermore, it would encourage more workers to join 

small businesses, as they would have access to more affordable health insurance. 

In the third report in the series, the CEA examined the benefits of health care reform to state and 

local governments, which employ one-in-seven workers in the U.S., with these including: 

A reduction in spending on uncompensated care. State and local government currently 

spend billions of dollars each year on uncompensated care for the uninsured. Reforminduced expansions in coverage would reduce the need for this patchwork of programs, 

with the savings more than offsetting the costs of reform-induced expansions in Medicaid 

enrollment. This would alleviate some of the strain on state and local budgets while 

allowing them to direct more funds to education, public safety, and other priority areas. 

Lower spending on employee health insurance premiums. State and local 

governments pay approximately $100 billion each year on health insurance for their 19 

million employees. Reductions in the ―hidden tax‖ of uncompensated care for the 

uninsured would reduce premiums for government employees, thus allowing them to pay 

higher wages or enjoy budget savings. 

The benefits cited above are by no means an exhaustive list, but capture many of the key 

channels through which well-designed health care reform that expands health insurance coverage 

and reduces the growth rate of costs would benefit individuals, employers, and governments at 

every level. 

V. CONCLUSION

The legislation currently working its way through Congress can deliver on its promise to 

substantially reduce the growth rate of health care costs in both the public and private sector in 

the years ahead, provided key cost containment features are preserved in the final bill. The 

reforms included in the legislation will improve the economic well-being of individuals, families, 

employers, and governments at every level. 
11

APPENDIX A: DETAILS ON EXCISE TAX CALCULATION

The purpose of this appendix is to explain the CEA calculations of the effect of the proposed 

excise tax on the growth of private health care costs. 

Absent reform, CMS projects third-party private expenditures of $1.193 trillion in 2012 and of 

$1.693 trillion in 2018.19 That is an annualized (real) growth rate of 6.0 percent. 

Under the Senate bill, CBO projects no excise tax revenue in 2012 and $30 billion in 2018. CBO 

and JCT estimate that 81.2 percent of this additional revenue is attributable to higher wages as 

employers shift compensation from health insurance to wages.20 Thus $24.4 billion in revenues 

come from that channel in 2018. If one assumes that a Federal marginal tax rate of 35 percent 

applies to individuals affected by the tax and that each dollar in freed-up health care spending 

leads to one dollar in additional wages, this implies $69.6 billion in higher wages and thus $69.6 

billion in lower private health insurance premiums. Note that assuming a lower relevant marginal 

tax rate would make this reduction even higher. 

It is plausible that even if individuals increase their wages by $69.6 billion, they may not reduce 

health expenditures by that amount. While individuals may elect for a greater fraction of their 

total compensation in the form of wages, they may also select plans with higher consumer copays and deductibles. Thus these consumers would not reduce overall health care spending 

dollar-for-dollar with their increase in wages. However, it is likely that most of this shift in 

compensation from insurance premiums to wages would lead to a reduction in overall health care 

spending, as consumers reduce their use of low-value services and insurers reduce their markup 

factors. If one assumes that one-third of this $69.6 billion decrease in private health insurance 

premiums takes the form of higher out of pocket spending, then private spending would fall by 

$46.4 billion. 

To estimate third-party private expenditures due to this tax, we assume that the tax will have no 

influence on these expenditures in 2012 because the government expects to collect no revenue 

this year. For 2018, we subtract the estimated reduction in private spending ($46.4 billion) from 

the projected third-party cost absent reform ($1.693 trillion), yielding $1.646 trillion. The 

average annual growth rate from $1.193 trillion to $1.646 trillion over six years is 5.5 percent, 

and thus yields an annualized savings of 0.5 percent per year. See Table 1. 

 

19 See Table 3 from the National Health Expenditure Projections, 2008-2018, from CMS. A version of the report is 

available at: http://www.cms.hhs.gov/NationalHealthExpendData/downloads/proj2008.pdf. The estimates presented 

below take the sum of private health insurance and other private funds under third-party payments. These numbers 

were calculated using the CBO score of the Senate bill. In this report, the CBO did not release estimates for the 

fiscal impact of provisions if those impacts were between -0.5 billion and +0.5 billion, so there may be some degree 

of rounding error. See notes to Table 1 of the November 18th score of the Senate bill. 

20 MIT economist Jonathan Gruber has estimated similar results for the impact of the excise tax on wages, although 

he computes net rather than gross wage gains. Gruber, Jonathan. ―Impacts of the Senate High Cost Insurance Excise 

Tax on Wages: Updated.‖ November 20, 2009. http://econ-www.mit.edu/files/4895 
12

Table 1: Private Health Care Costs (Billions of $)

Year Baseline Reform

2012 1193.2 1193.2

2018 1692.8 1646.4

Annualized Growth Rate 6.0% 5.5%

Note that in the above calculation, we assume that ―private health care‖ costs consists of the sum 

of spending on third-party private health insurance and other private funds, as classified by CMS. 

An alternative would be to assume that some fraction of the ―out-of-pocket‖ payments is also 

paid by the privately insured. For example, if one-third of these costs were paid by the uninsured, 

one-third paid by Medicare, and one-third by the privately insured, absent health reform thirdparty private expenditures would increase by 5.9 percent at an annualized rate between 2012 and 

2018. Under reform, the growth in cost would be 5.4 percent at an annualized rate over the same 

period. Hence, under this alternative scenario, reform would also reduce this rate by 0.5 percent 

per year. 
13

APPENDIX B: DETAILS ON MEDICAID & MEDICARE CALCULATIONS

To estimate the effect of reform on Federal spending on Medicare and Medicaid, we first use 

projections from the CBO21 to establish baseline Federal spending on these programs of $1.027 

trillion in 2016 and $1.236 trillion in 2019. Absent reform, these estimates suggest that Federal 

spending on Medicare and Medicaid will increase 6.4 percent at an annualized rate between 2016 

and 2019. Table 2 outlines these baseline projections. 

As mentioned in the text, the sum of Federal expenditures on these programs will initially 

increase as eligibility for Medicaid expands. However, reform also includes savings from 

eliminating waste, fraud, and abuse and from delivery system reforms. CEA calculations based 

on estimates from the November 18, 2009 CBO score of the Senate bill,22 summarized in Table 

3, show that on net reform will both reduce the growth rate in costs and, by 2019, reduce the 

combined level of Federal spending on these programs. Under reform, the growth in health care 

costs from 2016 to 2019 is an annualized 5.6 percent, or 0.7 percentage point per year less 

than the baseline.23

Table 2: No Reform Scenario (Billions of $)

Medicare and Medicaid 

Federal Spending

Annualized

% Growth

2016 1,027 6.4% 2019 1,236

Table 3: Reform Scenario (Billions of $)

Medicare and Medicaid 

Federal Spending

Annualized

% Growth

2016 1,037

5.6% 2019 1,222

 

21 Congressional Budget Office. CBO‘s Baseline Projections of Mandatory Spending. Table 1-4.

http://www.cbo.gov/ftpdocs/105xx/doc10521/budgetprojections.xls. The expenditure amounts include $6 billion in 

projected CHIP spending in both 2016 and in 2019. Baseline Federal spending on Medicare, Medicaid and CHIP is 

calculated as the sum of lines 12 (Medicare outlays), 14 (Medicaid outlays), and 49 (CHIP outlays) less line 57 

(offsetting receipts in the Medicare program). 

22 See Congressional Budget Office. Letter to the Honorable Harry Reid. ―Patient Protection and Affordable Care 

Act: Cost estimate for the amendment in the nature of a substitute to H.R. 3590.‖ November 18, 2009. The 

calculations for savings from reform include the net effect of Estimated Changes in Direct Spending and Revenues 

Resulting From the Patient Protection and Affordable Care Act, drawn from Table 2 of the CBO score of the 

legislation. These calculations include net changes in spending on Medicare, Medicaid, and CHIP. 

23 More specifically, the change is from 6.36 percent to 5.62 percent per year, which is 0.74 percent per year.