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Thinking Long-Term

Posted by Peter Orszag on July 08, 2010 at 01:21 PM EDT
Last week, the Congressional Budget Office released its long-term budget outlook. As I wrote at the time, the report confirms that the Affordable Care Act, if implemented effectively, can play an important role in moving toward a healthier fiscal future. Brad DeLong recently highlighted how large that role is by comparing last year’s report to this year’s, and I thought it was worth underscoring the point.
 
In particular:
  • CBO projects that the Affordable Care Act will, unless Congress reverse some of its provisions in the future, reduce the long-term fiscal gap — the amount by which revenues must be raised or spending cut to produce a stable debt trajectory — by 2 percent of GDP over the next 75-years. (Between CBO’s long-term report from last year and its report from this year, the 75-year fiscal gap under the "baseline scenario" has been cut by 2.5 percentage points of GDP. There has been only one major change to fiscal outlook in that period — the enactment of the Affordable Care Act. And, based on both the CBO report’s narrative and backup data, the Affordable Care Act is responsible for roughly 2 percentage points of GDP of this deficit reduction.)
     
  •  Furthermore, CBO's analysis may underestimate the impact of effectively implementing the Act. Specifically, starting in 2030 under its baseline scenario, CBO essentially assumes that a number of the savings measures in the Affordable Care Act — most importantly, the Medicare Independent Payment Advisory Board (IPAB) — are "turned off," with the growth rate of Medicare costs returning to what it would have been in the absence of the legislation instead of continuing at the lower rate both assumed by CBO prior to 2030 and explicitly required by the law as a target for the IPAB process.  If instead, the IPAB continued limiting cost growth in Medicare after 2030 as it is supposed to, this would increase the deficit reduction produced by the Affordable Care Act by about another half of a percentage point of GDP over the next 75-years — so the reduction in the fiscal gap would amount to about 2.5 percent of GDP.
     
  •  Last year, CBO put the 75-year fiscal gap at about 8 percent of GDP; this assumes current policies — such as the 2001/2003 tax cuts, relief from the Alternative Minimum Tax, and a fix to the Medicare physician payment system — are continued. The figures above suggest that if fully implemented, the Affordable Care Act would reduce this by about one quarter to one third, or to roughly 5 to 6 percent of GDP.
In its official score of the Affordable Care Act, CBO found that the law would reduce the deficit by more than $100 billion — or about 0.1 percent of GDP — over the next decade and more than $1 trillion — or about 0.5 percent of GDP — in the decade after that. While this is the most deficit reduction enacted since the 1990s, it is smaller than these long-term effects. 
 
The reason is that, by design, the Act’s budget savings increase significantly faster than its costs —producing a rapidly growing wedge of deficit reduction. For example, one of the fastest growing deficit reduction measures is the excise tax aimed at high cost insurance plans; this is a measure that is often cited by experts as one of the keys to reducing health cost growth over time. 
 
To be sure, achieving this deficit reduction requires that the Affordable Care Act be implemented effectively. As I wrote before, the CBO report includes an "alternative scenario" in which many of the Affordable Care Act’s cost-saving measures are curtailed starting in 2020, and, not surprisingly, this eliminates most of the deficit reduction produced by the Act. In short, mere enactment is not enough; as CBO shows, implementation is essential.
 
Finally, the figures also show that even with enactment of the Affordable Care Act, we remain on an unsustainable fiscal course.  More needs to be done. But the bottom line is that, after years of going in the wrong long-term fiscal direction, the Affordable Care Act changes our course by enacting substantial, long-term deficit reduction — deficit reduction that this Administration is committed to implementing and building on.
 
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