Cost and Coverage Impacts of the President’s Health Care Reform Proposal and a Congressional Tax Credit Proposal. 10-Year Estimates

05/19/2008

We projected the cost of the two proposals over the 10-year period, 2009 through 2018.  Note that when projecting program enrollment and costs, we assume a 40 percent phase-in for 2009 and an 80 percent phase in for 2010, with the program reaching ultimate enrollment beginning in 2011.  Therefore, the 2009 impact estimates in our projections differ from those discussed above, which assumed a fully-phased-in program in 2009. 

President’s Proposal.  In Figure 17 we display 10-year projections of the cost of the President’s program to the federal government.  The increase in the deficit during the initial implementation of the program would diminish in the following years because of the way the tax deduction amount is indexed.  The deduction amount (i.e., $7,500 single; $15,000 family) is indexed each year to the growth in general price levels as measured by the consumer price index, which is about 2.8 percent per year.  Because health care costs are projected to grow at about 7.0 percent per year, the revenue gain from taxing employer benefits would grow faster than the revenue loss due to the deduction. 20

Consequently, by 2015 the proposal would result in a net reduction in the federal deficit of about $15.4 billion.  The net effect of the proposal over a ten-year period from 2009 through 2018 would be a net increase in the federal deficit of about $25.7 billion.

The Congressional Tax Credit Proposal.  As with the President’s proposal, the increase in the deficit during the first years of the Congressional tax credit proposal would diminish in the following years because of the way the tax credit amount is indexed (Figure 18).  This is because the tax credit (i.e., $2,000 per adult and $500 per child up to a maximum of 2 children) is indexed with the growth in the chain-weighted Gross Domestic Product, which grows at about 2.2 percent per year, while the tax exclusion that it replaces would be expected to grow with health care cost inflation at about 7.0 percent per year.21 Consequently, by 2012 the proposal would result in a net reduction in the federal deficit of about $12.4 billion. The net effect of the proposal over a ten-year period from 2009 through 2018 would be a net increase in the federal revenue of about $564.4 billion.

  2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009-2018
Figure 17: Federal Program Costs under the President’s Program: 2009-2018 (in $ billions) a/ b/
Health Care Tax Deduction for Private Insurance c/ $283.6 $299.7 $312.4 $321.6 $331.2 $341.1 $351.2 $361.7 $372.5 $383.8 $3,358.6
DSH funding redirected to Affordable Choices at current Federal matching rates d/ $1.8 $4.0 $5.4 $5.8 $6.3 $6.8 $7.4 $8.0 $8.6 $9.2 $63.3
Total Affordable Choices Spending e/ $4.5 $9.8 $13.2 $14.3 $15.5 $16.8 $18.2 $19.7 $21.1 $22.6 $155.6
Net Spending for Affordable Choices $2.7 $5.8 $7.8 $8.5 $9.2 $9.9 $10.8 $11.7 $12.5 $13.4 $92.3
Current Medicaid/SCHIP d/ $0.93 $2.02 $2.7 $2.9 $3.2 $3.5 $3.7 $4.0 $4.3 $4.7 $32.1
Eliminate ESI Tax
Exclusion f/
($229.9) ($250.3) ($272.3) ($296.2) ($322.3) ($350.5) ($381.0) ($414.3) ($450.5) ($489.8) ($3,457.2)
Net Program Costs/Savings $57.3 $57.1 $50.6 $36.8 $21.3 $4.0 ($15.4) ($36.9) ($61.1) ($88.0) $25.7
CPI Growth   2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8% 2.8%  
Growth in ESI Coverage   0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%  
Medicaid Spending Growth   7.9% 8.1% 8.2% 8.2% 8.2% 8.3% 8.3% 7.2% 7.2%  
Personal Health Care Spending Growth   7.0% 6.9% 6.9% 6.9% 6.9% 6.9% 6.9% 6.9% 6.9%  
Tax Exclusion Growth over and above Medical Inflation   1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8%  

a/ We assume a 40 percent phase-in for 2009 and an 80 percent phase in for 2010, with the program reaching ultimate enrollment beginning in 2011.  Therefore the full impact on spending is not experienced until 2011.
b/ We assume that the relative value of the tax deduction decreases over time as medical price inflation increases faster than the health care tax deduction, which is indexed to the consumer price index.  This effect reduces the number of people expected to use the tax deduction.
c/ The growth in the tax deduction is indexed to the growth in the consumer price index, which is approximately 2.8 percent each year, plus growth in ESI coverage.   
d/ DSH funding and Medicaid spending are assumed to grow at a similar rate to total Medicaid expenditures as projected by the Office of the Actuary, Centers for Medicare & Medicaid Services (CMS).  The latest projections are available on the CMS website at: http://www.cms.hhs.gov/NationalHealthExpendData/03_NationalHealthAccountsProjected.asp#TopOfPage.
e/ Affordable Choices spending is assumed to grow at a similar rate to Medicaid spending.
f/ The value of the ESI tax exclusion is assumed to grow similarly historical rates, which we measured as personal health care expenditures growth (CMS projections) plus about 1.8%. This additional amount is assumed to account for growth in personal incomes resulting in increased marginal tax rates over time.

Source: Lewin Group estimates using the Health Benefits simulation model (HBSM).

  2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2009-2018
Figure 18: Federal program costs under the S.1019 Proposal: 2009-2018 (in $ billions) a/ b/
Tax Credits c/ $245.9 $264.8 $277.0 $282.6 $287.5 $292.6 $298.2 $303.9 $309.7 $316.2 $2,878.3
Current Medicaid/
SCHIP d/
$1.0 $1.1 $1.2 $1.3 $1.4 $1.5 $1.6 $1.7 $1.9 $2.0 $14.5
Eliminate ESI Tax Exclusion e/ ($229.9) ($250.3) ($272.3) ($296.2) ($322.3) ($350.5) ($381.0) ($414.3) ($450.5) ($489.8) ($3,457.2)
Net Program Costs/Savings $17.0 $15.5 $5.9 ($12.4) ($33.4) ($56.4) ($81.3) ($108.7) ($138.9) ($171.6) ($564.4)
Chain-weighted GDP   2.6% 2.5% 2.3% 2.0% 2.0% 2.1% 2.1% 2.1% 2.1%  
Growth in ESI Coverage   0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3% 0.3%  
Medicaid Spending Growth   7.9% 8.1% 8.2% 8.2% 8.2% 8.3% 8.3% 7.2% 7.2%  
Personal Health Care Spending Growth   7.0% 6.9% 6.9% 6.9% 6.9% 6.9% 6.9% 6.9% 6.9%  
Tax Exclusion Growth over and above Medical Inflation   1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8% 1.8%  

a/ We assume a 40 percent phase-in for 2009 and an 80 percent phase in for 2010, with the program reaching ultimate enrollment beginning in 2011.  Therefore the full impact on spending is not experienced until 2011.
b/ We assume that the relative value of the tax credit decreases over time as medical price inflation increases faster than the tax credit, which is indexed to the change in the chain-weighted price index for the gross domestic product.  This effect reduces the number of people expected to use the tax credit.
c/ The value of the Tax Credit is assumed to grow at the chain-weighted Gross Domestic Product plus the growth in people with ESI coverage as projected by the Office of the Actuary, Centers for Medicare & Medicaid Services (CMS).  The latest projections are available on the CMS website at: http://www.cms.hhs.gov/NationalHealthExpendData/03_NationalHealthAccountsProjected.asp#TopOfPage.
d/ Medicaid spending is assumed to grow at a similar rate to total Medicaid expenditures as projected by the Office of the Actuary, Centers for Medicare & Medicaid Services (CMS).  The latest projections are available on the CMS website at: http://www.cms.hhs.gov/NationalHealthExpendData/03_NationalHealthAccountsProjected.asp#TopOfPage.
e/ The value of the ESI tax exclusion is assumed to grow similarly to historical rates, which we measured as personal health care expenditures growth (CMS projections) plus about 1.8%. This additional amount is assumed to account for growth in personal incomes resulting in increased marginal tax rates over time.

Source: Lewin Group estimates using the Health Benefits simulation model (HBSM).

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