The Current Health Care Policy Approach Has Fiscal Risks

Policy Memo
Tuesday, June 27, 2017

With the release of the Senate health care proposal and its analysis by the Congressional Budget Office (CBO), it’s clear that the House and Senate are taking the same approach on health care policy.

According to CBO, the Senate bill would decrease spending by $1,022 billion and decrease revenue by $701 billion, leading to a total deficit reduction of $321 billion over the 10-year budget window from 2017 to 2026. The House bill was scored as reducing the deficit by $119 billion.

Already there is talk of using some of the “extra” deficit reduction from the Senate bill to placate individual Senator concerns with parts of the legislation. Yet, the particular amount of 10-year deficit reduction in these bills is not as important as the fiscal risks from the policy approach Congress is taking.

The Senate bill follows the path of the House in not offering any policy that would attempt to control the growth trajectory of health care system costs. While federal spending on health care would go down under the bill, the “cost curve” of long-term health care inflation remains untouched.

Ultimately that is a problem because inflation will continue to drive up the cost of Medicare, make the Medicaid savings assumed in the legislation more difficult to achieve, and decrease the relative value of the tax credits meant to help people find affordable health care insurance in the non-group market.

The House and Senate bills also make long-term cost control more difficult by delaying implementation of a tax on high-cost insurance plans, the “Cadillac Tax.” During the passage of the Affordable Care Act, the CBO estimated the Cadillac Tax to be the most effective cost-control mechanism in the legislation. While it was initially scheduled to go into effect in 2018, it has been delayed until 2020 and it would now be delayed to 2026 -- bringing even more into question whether it will ever be implemented and whether the assumed savings will ever materialize.

Also troubling from a fiscal policy standpoint is the main focus of the legislation: cutting taxes and paying for the cuts largely through a reduction in Medicaid spending. The figures below are 10-year totals.

Main Focus of Current Health Care Legislation
  House Bill      Senate Bill
Tax Cuts      $661 Billion     $563 Billion  
Medicaid Spending Cuts      $834 billion $772 Billion  

Legislation that reduces revenue in the current fiscal environment, with deficits growing as far as the eye can see, makes little sense. In this case the tax cuts come with an extra fiscal risk.

The health care legislation calls for tax cuts that take effect sooner than phased-in cuts to Medicaid that grow dramatically over time. The risk is that the magnitude of the Medicaid reductions will prove unrealistic. Budgetary pressure on state governments and economic pressure faced by hospitals and other providers could grow so large from the reductions that Congress will be forced to delay the reductions or lessen their severity.

This seems likely given that the proposed caps on Medicaid spending are not linked to any health care-related analysis or goal of what is or should be achievable in terms of cost savings or efficiency. Yet, the tax cuts would already be in effect even if the savings from Medicaid get lessened down the line -- worsening the fiscal result.

There are other fiscal risks from the direction the House and Senate are headed. There is the possibility that the marketplace insurance subsidies prove inadequate and a likelihood that some states will see insurance markets collapse entirely. These problems could lead to political pressure to increase spending down the road. And again, this would be after all of the tax cuts have taken effect.

The Senate should pause to think carefully about what needs to be fixed in the insurance market and how to make it better. They should continue to utilize the expertise of the CBO throughout the process. Let’s also hope senators and members of the House redirect the focus of health care legislation to long-term cost control providing a lasting benefit for individuals, states and the federal government.

As the legislative process moves forward, lawmakers should assess the realistic trade-offs of costs, access to care, and quality of care. Legislation that moves too quickly without such a thorough consideration risks massive insurance loss, public frustration, uncertainty for providers, gyrating insurance premiums and repeated overhauls with each new Congress and each new president.