The Fiscal Consequences of the Affordable Care Act

Because of the federal government’s untenable long-term fiscal outlook under current law, and because of the political difficulty (and thus infrequency) of comprehensive health care reform, it is essential that such reform unambiguously and significantly improve the government’s fiscal outlook.

On March 23, 2010, President Barack Obama signed into law the Patient Protection and Affordable Care Act, often referred to simply as the Affordable Care Act or ACA. The enactment of this law represented the culmination of many policy advocates’ strenuous efforts. Among other changes, the law would establish a federal mandate that all individuals purchase health insurance, create federally subsidized health insurance exchanges, expand eligibility for Medicaid, reduce the growth of Medicare payments, and impose an array of new taxes.

Among the strongest hopes reposed in comprehensive health care reform was that it would deliver a much-needed correction to the federal government’s unsustainable fiscal outlook. This objective was assuredly not the only one; multiple aspirational goals for the effort were articulated. Other stated objectives included humanitarian ones, such as using the authority of the federal government to dramatically expand health insurance coverage. But while the priority given to different objectives varied according to the advocate, the fiscal benefits of reform were consistently presented as a primary motivation for enacting legislation.

During the 2009–10 period that health care legislation was being considered (as well as afterward), supporters frequently quantified the fiscal benefits predicted to arise under specific bills. Earlier, before specific bill text was available (and especially in 2007–09), the fiscal case for reform had been made more generally and abstractly. The essence of this view was that the federal government’s long-term fiscal shortfall was almost entirely due to excess health care cost inflation and that comprehensive health care reform was therefore the most urgent requirement for fixing the fiscal problem. Advocates for this view ranged from noted experts at the Brookings Institution to the head of the influential advocacy organization AARP.

This viewpoint increased in prominence when Peter Orszag, one of its leading advocates, was named to head the Congressional Budget Office (CBO). Soon thereafter, CBO published a frequently cited graph that appeared to substantiate the view that the fiscal problems created by excess health care inflation dwarfed those arising from other known sources of fiscal strains, such as population aging.

This author and others criticized these portrayals, believing they overstated the (undeniably substantial) prominence of excess health care inflation relative to the more pressing factor of demographic change. CBO later modified its presentations to clarify that population aging would remain the more significant source of fiscal strain for decades into the future. In 2011, for example, CBO found that through 2035, population aging would account for fully 64 percent of the cost growth in the major federal mandatory health programs and Social Security, with excess healthcost inflation being a relatively smaller factor.

By the time of these later publications, however, the impression had already been created in the minds of many that health care reform was itself the key to fixing the federal government’s fiscal outlook. The seductive premise was that health-cost inflation was the appropriate primary target, through reforms that aimed to render the health care sector more efficient, as opposed to the politically unattractive task of constraining the number of health care consumers receiving federal assistance.

Despite disputes over the specific numbers, experts of a variety of policy views generally agreed that rapid health care cost inflation was a substantial problem with potentially severe consequences for federal finances. Policy differences over whether such reforms should involve expanding or contracting the federal role in health care remained, along with differences over how much of the government’s overall fiscal repair could be accomplished through health care reform alone. Nevertheless, there was a general concurrence that health care reform, however undertaken, must significantly improve the fiscal outlook.

Throughout 2009, advocates urged that health care reform be given the highest priority among economic policy objectives because it was itself the essence of meaningful fiscal reform. Orszag, by 2009 director of the Office of Management and Budget (OMB), stated at a White House fiscal responsibility summit that “health care reform is entitlement reform. The path to fiscal responsibility must run directly through health care.” President Obama later echoed this argument, stating in April 2009, “Make no mistake: health care reform is entitlement reform.”

As the legislative process moved from general principles to specific decisions, supporters coalesced around including a substantial expansion of health insurance coverage, subsidized by the federal government, as a major focus of the legislation. These advocates, including the Obama administration, argued that this coverage expansion was consistent with—or at least not destructive of—successful fiscal consolidation. As OMB director Orszag wrote in a May 2009 blog post, “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.”

This statement implicitly acknowledged that health care reform, at least as envisioned by the spring of 2009, would not embody an unalloyed, immediate fiscal improvement. Instead, due to an expansion of federally subsidized health insurance coverage, federal health care cost growth would first accelerate before it slowed down. This rendered the hoped-for fiscal improvement both more modest and more distant: confined to not making a bad situation worse over the first 10 years of reform, while anticipating a net fiscal improvement in the decades beyond.

Those familiar with Washington, D.C., budget agreements will recognize a familiar gambit here: specifically, worsening fiscal pressures in the short run to gain agreement on changes in law hoped to improve the long-term outlook. In the past, this gambit has not always produced lasting fiscal improvements. A too-common legislative occurrence is for the long-term austerity measures to be later repealed or moderated before they take full effect, while the added costs take root and mount over time.

After the ACA was enacted, supporters of the law frequently pointed to a CBO analysis that appeared to show that it would reduce federal deficits by $124 billion over the first decade (a figure since increased to $210 billion with the shift of the end of the 10-year budget window from 2019 to 2021), and by over $1 trillion during the second. President Obama himself has referred to the $1 trillion figure, stating in an April 2011 speech that the reforms in the health care law would “reduce our deficit by $1 trillion.” Fiscal benefits have thus remained a central, if not the primary, justification for the enactment of health care reform legislation.

There are, of course, many arguments to be made both on behalf of and in opposition to the health care reforms recently enacted. In particular, the humanitarian arguments for expanded federally subsidized health insurance coverage are important, complex, and beyond the scope of this study. On the one hand, advocates contend that expanding coverage should be a goal in and of itself; on the other, opponents question the humanitarian achievement of making additional long-term promises beyond those the federal government has yet shown the capacity to honor. Though this is an important debate, this study instead focuses solely on evaluating whether the recent legislation will achieve the fiscal benefits believed by supporters and opponents alike to be essential.

Because of the federal government’s untenable long-term fiscal outlook under current law, and because of the political difficulty (and thus infrequency) of comprehensive health care reform, it is essential that such reform unambiguously and significantly improve the government’s fiscal outlook. For our unsustainable fiscal trajectory to remain qualitatively unimproved after the expenditure of so much political capital would represent a substantial failure of governance. Furthermore, for comprehensive health care reforms to have rendered an already unsustainable federal fiscal situation still worse would be a disastrous outcome warranting immediate legislative corrections before the law becomes fully operational and before such corrections become too difficult to achieve.