Peter G Peterson Foundation Releases New Health Care Reform Study

Oct 30, 2009

NEW YORK (October 30, 2009) - A study commissioned by the Peter G. Peterson Foundation on S. 1796, America's Healthy Future Act of 2009 (the "Act") confirms the Congressional Budget Office (CBO) analysis that the bill, as passed by the Senate Finance Committee, could result in slightly lower deficits if it is implemented as intended and remains unchanged. The study, conducted by The Lewin Group, mirrors the findings that new revenues and savings under the bill, would exceed new spending. However, while coverage gains would be more immediate, the pain of paying for new coverage would build over time, raising questions about whether those financing measures would be fully implemented and left unchanged.

"The Senate Finance Committee bill does the best job out of all the current health care reform bills from a fiscal perspective. However, it does not meet the Foundation's four tests for a fiscally responsible health care bill, and it relies on certain cost containment approaches that have not worked in the past. Stronger budget controls and more dramatic health care reforms will be necessary to put the system on a more prudent and sustainable path," said David M. Walker, President and CEO of the Foundation.

The Senate Finance Committee proposal represents an important step forward in the country's efforts to achieve sustainable, affordable health care reform. Once enacted, if its provisions are left in place, it would meet two of the Foundation's four tests for fiscally-responsible health care reform and make meaningful progress payment on the third. It would:

  • Achieve deficit neutrality in the first 10 years;
  • Maintain deficit neutrality beyond 10 years; and
  • Slow the rate of growth in Medicare's costs, helping to reduce that program's tens of trillions in unfunded promises.

While the proposal includes language that prohibits the use of any Medicare savings that it would achieve to offset the costs of other federal programs, the provision is unenforceable and Medicare savings would be used to offset the cost of new health benefits. As a result, the proposal does not meet the Foundation's fourth test: it does not bend the total health care cost curve downward as a percentage of the economy.

Senate Finance Committee proposal demonstrates how difficult it will be to achieve deficit neutrality over the longer term. The bill would make important insurance market reforms designed help people obtain insurance. However, it does not include the types of fundamental payment and delivery system changes that are believed to be necessary to address underlying cost drivers. Instead, the bill relies on payment limitations and other assumptions designed to pressure the health care system into a more affordable path including health care provider payment approaches that have failed to work in the past. Will it work? Or will those provisions prove to be too difficult for future policy makers to sustain? The risk is that the federal budget will incur substantial new costs for popular benefits without realizing the projected financing from painful savings and revenue measures.

While the study finds that the legislation would extend new coverage to just under half of the number of people who otherwise would be uninsured, with deficits projected to top $7.1 trillion over the next 10 years according to latest estimates from CBO, the proposed reform provides a very small contribution toward solving the serious fiscal challenges that face the country over the long term. To bring health care costs under control, policy makers must do more to strengthen incentives throughout the system--among providers, insurers, and the public. That will require greater transparency so consumers--who ultimately pay the bills whether through taxes, premiums, direct payments, or reduced wages--are more aware of how much they are paying for health care and, thus, are able to make more informed decisions about the tradeoffs of cost, utilization of services, and quality. Instead of acknowledging more realistic budgetary outcomes, the proposal leans heavily on cost savings and new revenues that are likely to be illusory.

"Given what we know today, The Lewin Group study provides important insights into the potential impact of the Senate Finance Committee's bill on the federal budget, employers, state and local governments, and households. What it shows is that unless we reduce overall health care expenditures, reform will simply shift costs around. In the end, Americans will pay the full bill," said Susan Tanaka, the Foundation/s Director of Citizen Education and Engagement.

Key findings include:

Impact on Deficit:

  • The Act is fully funded with the revenues (including an excise tax on high cost health insurance benefits) and program savings included in the legislation over both the 2010 through 2019 and 2020 through 2029 period.
  • The Act reduces the deficit by $16 billion in the first decade and $355 billion over the second decade.
  • The impact on the Federal budget deficit is positive only if the reductions to reimbursement levels are maintained. More than half of the $404 billion in savings over the 2010 through 2019 period is attributed to reductions in the rate of growth in payments to providers for health services, plus reductions in hospital DSH payments.

Increase in Total Health Spending:

  • Without providing new measures to control the growth in costs, the study estimates that total health spending would rise from about 17 percent of gross domestic product (GDP) in 2010 to 25 percent in 2029.
  • The federal government's health spending would increase by almost $400 billion over the next 10 years and $1.6 trillion over the 20-year period.
  • By 2019, federal health-related spending would be 0.3 percent higher as a percentage of GDP. In 2029, the Act would increase federal health spending by 0.5 percent of GDP.

Reduction in Uninsured:

  • The Act would reduce the number of people who lack health insurance by 49 percent. That represents almost 24 million of the 49.2 million people, or nearly 16 percent of the population, who are projected to be uninsured in 2011.
  • The Act would impose a mandate on individuals to obtain and maintain health insurance coverage. It would create exchanges that would be designed to allow individuals and employers to purchase insurance at more affordable rates.

High Cost Health Benefit Tax Could Impact One Third of All Insured:

  • The revenue generated by the excise tax on high cost health insurance benefits would raise $241 billion in the first 10 years and $1.3 trillion between 2020 and 2029.
  • More and more plans will exceed the thresholds, and revenues from the excise tax will grow faster than projected subsidy costs. The study estimates that in 2013, 33 million people will be insured by policies subject to the excise tax. This number will grow to 119 million in 2029, or nearly one third of the projected population. The thresholds are indexed to the consumer price index (CPI) plus one percent; however, based on historical health care cost growth levels, Lewin assumed that premiums would grow at twice that rate.

Impact on Consumers:

  • The study assumes that the program will be fully mature in 2011 for illustrative purposes. In comparison to what consumers would spend in 2011 under current law, families who already have insurance would save an average of $8. However, in the first ten years, aggregate consumer health spending will increase almost $254 million (a 3% increase), and in the second ten years by $1 trillion (an additional 6.4% increase). Impacts would vary with incomes. Those with incomes under $10,000 would save $459 on average, while those with incomes of $150,000 or more would pay an average of $511 more for health care.
  • In 2011, families with one or more uninsured members would see an average increase in health spending of $1,205. Again, impacts would vary based on income. Those with incomes under $10,000 would save $409 on average, while those with incomes of $150,000 or more would pay an average of $3,364 more for health care.
  • The report assumes that fees and taxes paid by insurers, device and pharmaceutical manufacturers are eventually passed on to consumers as higher premiums. The study assumes that employers would eventually pass their higher benefit or tax costs through to workers in the form of lower wage growth, which also has implications for federal and state income and payroll tax revenues. As a result, average after-tax wages would decline by $43 per family. Those effects are captured in the impact on families and individuals. On average, families would see health care spending increase by about $218 in 2011 as more people gain coverage and some people obtain better coverage.

Impact on Employers:

Employer costs would vary depending on the size of the firm and whether or not they currently provide coverage. In 2011:

  • Employer health spending would decrease by an average of $118 per worker, due to the "crowd-out" effect expected as subsidized coverage under Medicaid and the exchange becomes available. Firms that currently sponsor insurance would see a decrease of $268 per worker due to firms discontinuing coverage as subsidized coverage under Medicaid and the exchange becomes available, while costs for firms that do not currently sponsor insurance would grow by $301 per worker due to mandates for coverage and additional fees.
  • Small firms that currently sponsor insurance would save up to $950 per worker, reflecting the small employer tax credit, the advantage of purchasing coverage through an exchange, and the "crowd-out effect."
  • The report assumes that increases in employer health spending under the mandate would be passed back to workers in the form of reduced wage growth.
  • After 2016, employer spending would increase above current spending levels steadily under the Act reflecting the cost of paying the various excise taxes under the Act. Total employer health spending would increase by 2.1 percent by 2019 compared to current spending levels.
  • Small businesses currently providing insurance would save up to an average of $950 per worker due to a tax credit and the advantages of purchasing coverage through the new health insurance exchanges in 2011.
  • The number of people covered in employer-sponsored plans (outside of the health insurance exchanges) would fall by 16 million, but overall enrollment in private plans, including those offered through the health insurance exchanges, would increase by almost 10 million in 2011. Impact on State and Local Governments: The Act would result in a net savings to state and local governments of about $64 billion over the 2010 through 2019 period, primarily due to savings in safety-net programs that currently serve the uninsured. States would save about $122 billion over the 2020 through 2029 period. "Doc Fix" omission: The Senate Finance Committee proposal omits a permanent solution to the Medicare physician payment problem, opting instead for a one-year fix, as has been the practice since 2003. This refers to the "sustainable growth rate" (SGR) formula for Medicare payments to physicians and other health practitioners, which was passed to reduce health care costs but is deferred each year by Congress. A permanent "doc fix," if included, would add over $200 billion to the deficit over 10 years and up to $700 billion over 20 years, more than wiping out the deficit reduction currently projected for the bill. Key Assumptions in the Report: In addition to the assumptions noted above, The Lewin Group study assumed the following to produce this analysis:
  • Where necessary, to show the impact of the plan, we assume the act is fully implemented in 2011 dollars.
  • Projections over 10 and 20 years are made assuming implementation is rolled out as specified in the bill.
  • Overall, cost and coverage impacts of The America's Healthy Future Act of 2009 are estimated using The Lewin Group Health Benefits Simulation Model (HBSM). To facilitate comparison of these proposals, Lewin adopted a standard set of data and assumptions that were applied uniformly across all of their similar studies. An in-depth explanation of HBSM is available on The Lewin Group's web site.

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