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February 26, 2013

Cost control success key to health reform’s impact on federal spending, deficit: GAO

By Jenny M. Burke, JD, MS

Cost control strategies are the key to the Patient Protection and Affordable Care Act’s (P.L. 111-148) (PPACA) successful long-term budget deficit impact (GAO Report, GAO-13-281, January 31, 2013). Right now, the federal budget is on an “unsustainable fiscal path driven on the spending side by rising health care costs and the aging of the population,” and depending on whether PPACA’s cost-saving mechanisms are effective, the law could swing the deficit either way, according to the Government Accountability Office (GAO) report.

GAO was asked to describe the long term effects of PPACA on the federal fiscal outlook under both its Baseline Extended (assuming federal laws remain unchanged) and Alternative simulations (assuming historical trends and policy preferences continue); how changes in assumptions for federal health care cost growth might affect the outlook; and the key drivers of health care cost growth and how the uncertainty associated with each may influence future health care spending. Either way, GAO found that “significant uncertainty” remains in PPACA’s effect on health care spending.

Increased enrollment. Under PPACA, federal health care spending is expected to continue growing faster than the economy. Increased enrollment in federal health care programs due to the aging of the population and expanded eligibility for Medicaid are the main causes for this growth, both now and over the next couple of decades. Future enrollment in Medicare remains clear, while Medicaid enrollment is cloudy. Medicare will see a large increase in enrollment between 2010 and 2030 as the baby boom generation reaches age 65 and is eligible to receive benefits. Medicaid enrollment could go from 54 million to around 74 million, depending on income growth and future policy changes.

Per capita spending. Over the longer term, GAO found that excess cost growth (the extent to which growth of health care spending per capita exceeds growth of income per capita) is a key driver in health care spending. If health care costs could be slowed, the budget may embark on a more sustainable path.

Technological advancements. Technological advancement has been a key factor in health care cost growth in the past, GAO noted, along with the effects of expanding health insurance coverage and increasing income. However, whether this trend continues remains uncertain, as it is impossible to predict the magnitude of the impact technological factors may have on future health care cost growth because technological change may take many forms. Therefore, technological advances remain perhaps the largest source of uncertainty for health care cost projections.

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