Welcome to the PPACA Cost (Or Savings) Dartboard

One thing about a democracy, everyone is entitled to publish their predictions about the future, and on the costs (or savings) of the Patient Protection and Affordable Care Act over the 2010-2019 decade, there are enough to cover the dartboard. Whether any have hit the bull’s-eye is another question.

The two most authoritative darts so far are those of the CBO and CMS’ Office of the Actuary. Each assumes that reform will be implemented exactly as stated in the new law, with no successful legal challenges and with legislated cost reduction targets achieved. The CBO forecast is limited to federal spending, while the OA projections cover both federal and overall national expenditures.

The CBO’s well-publicized (by reform advocates, anyway) dart hit the board immediately prior to passage of PPACA with an estimate of federal savings of $86 billion (excluding advance premiums from the new CLASS long-term care insurance program), or slightly less than one percent of projected federal health care spending.

The OA dart, thrown a month later and applauded by reform opponents as contradicting the CBO forecast, landed on the $289 billion number for increased federal spending (prior to CLASS premium collections), and on $310 billion for increased national health care expenditures.

Other darts have been tossed from the left and right of the board by health care economists, including—from the left—David Cutler, and—from the right—Douglas Holtz-Eakin. Not too surprisingly, their darts hit far apart, with Professor Cutler and his co-authors (of a Commonwealth Fund paper) forecasting federal savings of $400 billion and national spending reductions of some $590 billion, and Holtz-Eakin and his co-author (of a Health Affairs article) projecting increased federal costs of a horrendous $554 billion (possibly along with the end of American civilization).

What are we to make of a dartboard spread of more than a trillion dollars?

Let’s start with the CBO and OA numbers.

Trying to reconcile the two governmental forecasts is impossible without more detail of their respective models, although it is apparent that assumptions about individuals’ coverage choices vary significantly. Even approaches to counting the covered population are different: CBO uses an FTE approach, while OA counts enrollment, so that, for example, dual eligibles are counted under both Medicare and Medicaid, leading to total insured enrollment appearing to exceed the entire US population. One common feature of the two forecasts, however, is the very limited savings each believes will be achieved by health care system “modernization,” such as use of ACOs, more effective IT, new payment approaches, and increased emphasis on quality and effectiveness.

Moving on to the health care economists, the range of scores across our dartboard is truly startling.

Professor Cutler and co-authors Karen Davis and Kristof Stremikis start with CBO’s estimate of federal savings, modify this to include all newly covered individuals’ spending, then adjust the result to reflect their estimates of savings from “modernization” and use of exchanges, to give reductions of $590 billion in national health expenditures and $400 billion in federal spending.

Is this a well-aimed dart, or merely a triumph of hope over experience? Certainly, Cutler et al seem cavalier about costs; in comparing their estimate of spending before adjustments with OA’s $311 billion higher figure, they comment: “$30 billion a year is very small on the scale of health expenditures…” (It’s tempting to ask Professor Cutler for the loan of a quarter; with this casual attitude to money, he’ll probably offer his wallet.) Aside from this modest $311 billion item, the major differences between Cutler et al ‘s numbers and those of the CBO and OA are in savings from exchanges and “modernization.” Cutler et al believe that use of exchanges will reduce average insurer administrative costs by three percent, compared with the CBO’s estimate of just 0.4 percent, and that system “modernization” will trim medical costs by one percent a year, each year after 2014, compared with the CBO and OA projections of close to zero.

Meanwhile, on the right-hand side of the dartboard, Douglas Holtz-Eakin and co-author Michael Ramlet also start with the CBO numbers, but reject almost all federal spending cuts as politically infeasible, then add in $260 billion for health grants and physician reimbursement not mentioned in PPACA, to give their estimate of a monster federal spending hike of $554 billion.

So, who is closest to the bull’s-eye? Of the governmental forecasters, OA has the advantage of more detailed federal spending data, so that its estimates for Medicare and Medicaid may be the more credible. On the other hand, one area where OA diverges most from the CBO numbers—by some $330 billion—is in projected revenue from drug manufacturer fees, hospital insurance taxes, and other provisions, which might be more within CBO’s budgetary forecasting capabilities. Inserting the CBO estimates into the OA forecast would give a net reduction of federal spending of $40 billion—reasonably close to the CBO savings of $89 billion.

In contrast to the conservative approaches of CBO and OA, the economists’ darts seem to have been thrown somewhat wildly. Cutler et al’s projection of exchange administrative savings is surely too high given that two-thirds of those privately insured are in large groups, whose costs will be little affected by the exchanges, while their estimates of savings from “modernization” assume a remarkable degree of provider cooperation in revenue reduction. These optimistic forecasts aren’t infeasible, but they assume a degree of behavioral change by insurers and providers that seems unlikely without a major restructuring of the health care system.

The Holtz-Eakin forecast is as overly pessimistic as Cutler et al’s is optimistic. The contention that virtually every PPACA spending cut will be rejected as politically infeasible seems close to absurd, given both political parties’ promises to cut the deficit. Almost certainly, there will be some yielding to lobbyists, but a more likely effect will be modest shortfalls in savings from, for example, IPAB-recommended payment changes.

The conclusion? While both the CBO and OA darts look to land somewhere close to the target in terms of federal expenditures (except for the difference in revenue estimates), the path to the national spending bull’s-eye is much more uncertain. Some of the reform law’s changes are likely to result in insurer industry consolidation, which could begin to change the balance between providers and insurers and lead to lower medical costs. At the same time, providers’ revenue expectations may—in the face of Medicare cuts—result in further cost shifting to the private sector. Basic economic theory may also play a major part: reform-driven demand will increase much faster than supply, implying further increases in medical prices (as appears to have happened in Massachusetts). And, finally, the individual mandate may be overturned by the courts, undermining much of the foundation of PPACA outside of Medicare and Medicaid.

Roger Collier blogs regularly at Health Care Reform Update.