Health Care Reform and Fiscal Discipline

When I give public talks on health care reform, the question I receive most often is "given the government’s fiscal situation, how can it make sense for the government to take on new spending commitments as part of health reform?"  The answer is two-fold.  First, health care reform has two components: cost containment provisions and expanded coverage.  In the near term, the impact of expanded coverage will temporarily dominate, and health care reform will therefore temporarily increase government spending.   Over time, however, the impact of the cost containment provisions will accumulate, and the net impact will be a reduction – and perhaps a dramatic one – in government spending.  Second, while we are waiting for the cost containment provisions to take hold, we are insisting that health care reform be deficit neutral.  In other words, the Administration is committed to a health care reform that is at least deficit neutral over 10-years -- and deficit-reducing, potentially to quite a significant degree, over the longer term.
The two figures below represent stylized versions of health care plans similar to those being discussed in Congress.  The first figure shows the impact of reform on federal health care spending.  The solid line shows baseline federal spending on Medicare and Medicaid under the assumption that health care costs continue to grow at historic rates.  The three dotted lines show health care spending under reform.  In the three reform scenarios excess health care cost growth is reduced by 0.5, 1.0, and 1.5 percentage points, respectively.  With health care reform, spending initially increases because health care coverage expands, but reform also slows the growth of health care spending.  What we see is that it takes only 10 to 16 years after reform for Federal health care spending to be lower than it would have been in the absence of reform.

The second figure shows the impact of health reform on the budget deficit.  Within the 10-year budget window, the impact of health care reform is negligible because the plan is fully paid for; the short-term increase in spending will be offset with additional revenues.  Over the longer term the budget situation improves considerably – because health care spending declines and because taxable compensation increases.

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