March 19, 2010

Honorable Paul Ryan

Ranking Member

Committee on the Budget

U.S. House of Representatives

Washington, DC 20515

Dear Congressman:

This letter responds to several questions you have asked about the effects of an

amendment in the nature of a substitute to H.R. 4872, the Reconciliation Act of

2010, which was made public on March 18, 2010. That amendment (hereafter

called “the reconciliation proposal”) represents one component of the health care

legislation being considered by the Congress; the other component is a bill,

H.R. 3590, that the Senate passed in December. The analysis provided in this

letter is based on the preliminary estimate of the direct spending and revenue

effects of that amendment that was prepared by the Congressional Budget Office

(CBO) and the staff of the Joint Committee on Taxation (JCT).1

You asked about the total budgetary impact of enacting the reconciliation

proposal (the amendment to H.R. 4872), the Senate-passed health bill

(H.R. 3590), and the Medicare Physicians Payment Reform Act of 2009

(H.R. 3961). CBO estimates that enacting all three pieces of legislation would add

$59 billion to budget deficits over the 2010–2019 period.

Under current law, Medicare’s payment rates for physicians’ services will be

reduced by about 21 percent in April 2010 and by an average of about 2 percent

per year for the rest of the decade.2 H.R. 3961 would increase those payment rates

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by 1.2 percent in 2010 and would restructure the sustainable growth rate

mechanism beginning in 2011. Those changes would result in significantly higher

payment rates for physicians than those that would result under current law. CBO

estimates that enacting H.R. 3961, by itself, would cost about $208 billion over

the 2010–2019 period. (That estimate reflects the enactment of two short-term

extension acts, which lowered the cost in 2010 by about $2 billion compared with

CBO’s estimate of November 4, 2009.)3

H.R. 3590, the Patient Protection and Affordable Care Act, as passed by the U.S.

Senate on December 24, 2009, would establish a mandate for most residents of

the United States to obtain health insurance, set up insurance “exchanges” through

which certain individuals could receive federal subsidies to reduce the cost of

purchasing that coverage, and make numerous other changes in the health

insurance system, in federal health care programs, and in the federal tax code. The

reconciliation proposal would modify the Senate-passed health bill in several

ways (including changing federal programs involving postsecondary education).

CBO and JCT estimate that enacting both the reconciliation proposal and

H.R. 3590, as passed by the Senate, would reduce budget deficits by $138 billion

over the 2010–2019 period through their effects on direct spending and revenues

(including the savings achieved through the education provisions).

CBO estimates that enacting H.R. 3961 together with those two bills would add

$59 billion to budget deficits over the 2010–2019 period. That amount is about

$10 billion less than the figure that would result from summing the effects of

enacting the bills separately. The $10 billion difference occurs primarily because

H.R. 3590 and the reconciliation proposal would modify how the government’s

payments to Medicare Advantage plans are set. The higher payment rates for

physicians that would stem from the enactment of H.R. 3961 would, under current

law, result in higher payments to those plans. But the changes made by the other

bills would moderate that increase.

You also asked about the effects on the federal budget beyond the 2010–2019

period of enacting the reconciliation proposal (the amendment to H.R. 4872) and

the Senate-passed health bill (H.R. 3590) if several provisions were altered, either

now or at some point in the future. In particular, you asked about the effects if:

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would take effect in 2018 and for which the thresholds would be indexed

at a lower rate beginning in 2020—was never implemented;

insurance exchanges continued in the same way after 2018 as before—in

contrast with the arrangements under the reconciliation proposal, which

would slow the growth of subsidies after 2019;

in H.R. 3961 and described above was included; and

under certain circumstances, to recommend changes to the Medicare

program to limit the rate of growth in that program’s spending, and whose

recommendations would go into effect automatically unless blocked by

subsequent legislative action—was never implemented.

A detailed year-by-year projection, like those that CBO prepares for the 10-year

budget window, would not be meaningful over a longer horizon because the

uncertainties involved are simply too great. Among other factors, a wide range of

changes could occur—in people’s health, in the sources and extent of their

insurance coverage, and in the delivery of medical care (such as advances in

medical research, technological developments, and changes in physicians’

practice patterns) —that are likely to be significant but are very difficult to

predict, both under current law and under any proposal.

CBO has therefore developed a rough outlook for the decade following the 10-

year budget window. Under the analytic approach described in the agency’s

previous letters, the combined effect of enacting H.R. 3590 and the reconciliation

proposal would be to reduce federal budget deficits over the decade beyond 2019

relative to those projected under current law—with a total effect during that

decade in a broad range around one-half percent of gross domestic product

(GDP). If the changes described above were made to the legislation, CBO would

expect that federal budget deficits during the decade beyond 2019 would increase

relative to those projected under current law—with a total effect during that

decade in a broad range around one-quarter percent of GDP.

You further asked about the budgetary impact of enacting the reconciliation

proposal (the amendment to H.R. 4872) and the Senate-passed health bill

(H.R. 3590) excluding the cash flows of the Hospital Insurance (HI) trust fund,

from which Medicare Part A benefits are paid.

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On the basis of the economic forecast and technical assumptions underlying

CBO’s March 2009 baseline, CBO projected that, under current law, the HI trust

fund would be exhausted—that is, the balance of the trust fund would decline to

zero—during fiscal year 2017. Enacting the reconciliation proposal and the

Senate-passed health bill would reduce net outlays for Part A of Medicare by

$286 billion over the 2010–2019 period relative to that baseline, CBO estimates.

Enacting that legislation would also increase HI payroll tax receipts by about

$112 billion over that period, according to estimates by CBO and JCT. Together,

those changes in outlays and revenues would diminish budget deficits and add

$398 billion plus interest earnings to the trust fund’s balances over that 10-year

period. Given those changes in the financial flows of the trust fund, CBO

estimates that the HI trust fund would have a positive balance of about

$219 billion at the end of fiscal year 2019.

In the March 18, 2010, preliminary analysis of the budgetary effects of the

reconciliation proposal, CBO and JCT estimated that the direct spending and

revenue effects of enacting that proposal together with the Senate-passed health

bill (H.R. 3590) would yield a net reduction in federal deficits of $138 billion

over the 2010–2019 period. Thus, the legislation’s effects on the rest of the

budget—other than the cash flows of the HI trust fund—would amount to a net

For the decade beyond 2019, CBO expects that enacting the reconciliation

proposal and the Senate-passed health bill would reduce federal budget deficits

relative to those projected under current law—with a total effect during that

decade in a broad range around one-half percent of GDP. The legislation would

have positive effects on the cash flows of the HI trust fund in that decade that

would be larger than its effects on federal budget deficits as a whole. Therefore,

leaving aside the cash flows of the HI trust fund, CBO expects that the

reconciliation proposal and the Senate-passed health bill would yield a net

The increase in the balances of the HI trust fund that would result from enacting

H.R. 3590 and the reconciliation proposal might suggest that significant

additional resources—$398 billion plus additional interest to be credited to the

trust fund over time—had been set aside to pay for future Medicare benefits.

However, only the additional savings by the government as a whole truly increase

the government’s ability to pay for future Medicare benefits or other programs,

and those would be much smaller ($138 billion plus interest savings to be

achieved over time). In effect, the majority of the HI trust fund savings under

H.R. 3590 and the reconciliation proposal would be used to pay for other

spending and therefore would not enhance the ability of the government to pay for

future Medicare benefits.

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I hope this information is useful to you. If you wish further details, CBO would be

happy to provide them. The staff contacts for these estimates are Phil Ellis, Lori

Housman, and Tom Bradley.

Sincerely,

Douglas W. Elmendorf

Director

cc: Honorable John M. Spratt Jr.

Chairman

Honorable Nancy Pelosi

Speaker

Honorable John Boehner

Republican Leader