June 2017 Longer-Term Effects of the Better Care Reconciliation Act of 2017 on Medicaid Spending In the Congressional Budget Office’s assessment, CBO’s Extended Baseline Medicaid spending under the Better Care Reconcilia- The first 10 years of projections in CBO’s extended tion Act of 2017 would be 26 percent lower in 2026 baseline match the agency’s 10-year baseline projections, than it would be under the agency’s extended baseline, which are based on a detailed analysis of the Medicaid and the gap would widen to about 35 percent in 2036 program. Beyond the coming decade, however, pro- (see Figure 1). Under CBO’s extended baseline, overall jecting federal spending on Medicaid becomes increas- Medicaid spending would grow 5.1 percent per year ingly difficult because of the considerable uncertainties during the next two decades, in part because prices for involved. A wide range of changes could occur—in medical services would increase. Under this legislation, people’s health, in states’ decisions about Medicaid such spending would increase at a rate of 1.9 percent per eligibility and covered benefits, and in the delivery of year through 2026 and about 3.5 percent per year in the medical care—that are almost impossible to predict but decade after that. that could nevertheless have a significant effect on federal spending on Medicaid. Therefore, for the projections CBO and the staff of the Joint Committee on Taxation beyond 2026, CBO has adopted a formulaic approach— do not have an insurance coverage baseline beyond the one that combines estimates of the number of enrollees coming decade and therefore are not able to quantify the with fairly mechanical projections of growth in federal legislation’s effect on insurance coverage over the longer spending on Medicaid per enrollee (adjusted to account term. However, the agencies expect that after 2026, for demographic changes in Medicaid enrollees). That enrollment in Medicaid would continue to fall relative to straightforward approach, which was designed to help what would happen under the extended baseline. make long-term projections of federal deficits and debt, can be usefully applied only when analyzing proposed On the basis of consultation with the budget com- changes in law that, like this bill, would affect spending mittees, CBO’s just-released cost estimate for the bill in a similarly straightforward manner. measured the costs and savings relative to CBO’s March 2016 baseline projections, with adjustments for legisla- The agency’s estimates of per-enrollee growth in spend- tion that was enacted after that baseline was produced.1 ing combine projected growth in potential gross domes- For consistency, this longer-term analysis uses CBO’s tic product (GDP) per person and projected excess cost extended baseline published in July 2016.2 CBO ana- growth for Medicaid, which together average 4.3 percent lyzed these longer-term effects at the request of the in CBO’s extended baseline during the 2027–2036 Ranking Members of the Senate Budget Committee and period. Potential GDP expresses an estimate of the max- the Senate Finance Committee. imum sustainable level of growth in the economy. Excess cost growth is the growth rate of health care spending per person (after the effects of demographic changes are 1. Congressional Budget Office, cost estimate for H.R. 1628, the removed) relative to the growth rate of potential GDP Better Care Reconciliation Act of 2017, an amendment in the nature of a substitute [LYN17343] as posted on the website of per person. (CBO uses potential GDP rather than actual the Senate Committee on the Budget on June 26, 2017 (June 26, GDP in its estimate of excess cost growth to limit the 2017), www.cbo.gov/publication/52849. effect of cyclical changes in the economy on its estimate.) 2. Congressional Budget Office, The 2016 Long-Term Budget The concept of excess cost growth and its phrasing Outlook (July 2016), www.cbo.gov/publication/51580. are not intended to imply that growth in health care 2 Longer-Term Effects of the Better Care Reconciliation Act of 2017 on Medicaid Spending June 2017 Figure 1 . Effects of the Legislation Changes in Medicaid Spending Under the Better The largest effects on spending under the Better Care Care Reconciliation Act Compared With CBO’s Reconciliation Act of 2017 would be for Medicaid. Most of those effects would stem from three major provisions: Extended Baseline Percent OO Upon enactment, the legislation would eliminate 2026 2036 penalties associated with the requirements that most 0 people obtain health insurance coverage and that large employers offer their employees coverage that -10 meets specified standards. OO Starting in 2020, the growth in per-enrollee payments -20 for nondisabled children and nondisabled adults -26% -35% enrolled in Medicaid would be capped at no more than the medical care component of the consumer -30 price index (CPI-M) and for most enrollees who are disabled adults or age 65 or older at no more than the CPI-M plus 1 percentage point. Starting in 2025, the -40 rate of growth in per-enrollee payments for all groups Source: Congressional Budget Office. would be pegged to the consumer price index for all These estimates are for the Better Care Reconciliation Act of 2017, a urban consumers (CPI-U). Senate amendment in the nature of a substitute to H.R. 1628. Estimates are based on CBO’s July 2016 extended baseline. OO Starting in 2021, the bill would reduce the federal matching rate for funding for adults made eligible spending per person is necessarily excessive or undesir- for Medicaid by the Affordable Care Act (ACA); able; the term is used simply to describe the extent to that rate would decline 5 percentage points per year which the growth in such spending exceeds the growth through 2023 and then fall to equal the rate for other in potential output per person. enrollees in a state in later years. For Medicaid, the rate of excess cost growth is projected Overall, including all provisions affecting Medicaid, to be 0.7 percent in 2027 and to rise over the subsequent CBO estimates that spending for the program would be decade. In 2036, the rate is projected to be 0.9 percent, reduced by $160 billion in 2026 compared with projec- close to its 1985–2014 average of 1.0 percent. That tra- tions under current law. jectory of excess cost growth reflects competing pressures that are expected to affect the program. On the one Although it is generally not possible for CBO to provide hand, states are likely to face pressure—stemming from detailed estimates of the effects of changes in the nation’s physicians’ practice patterns, new technology, and other health care and health insurance systems beyond the factors in the broader health care system—to increase 10-year projection period used for cost estimates, the payments to health care providers so that they continue agency has developed a rough outlook for the decade fol- to treat Medicaid enrollees. On the other hand, as health lowing the 2017–2026 period by grouping the elements care costs rise, states are also expected to face pressure to of the legislation into two broad categories and assessing slow the growth of spending for the program through the rate at which the budgetary impact of each of those actions—such as delivering services more efficiently, broad categories is likely to increase over time: constraining payment rates for providers and managed care plans, limiting the optional services that Medicaid OO CBO separated out the portion of Medicaid spending covers, or restricting the eligibility of certain groups— in 2026 that would be affected by changes proposed that would reduce both state and federal expenditures. by the bill. For that portion, CBO approximated spending growth, accounting for the changes to the expansion of Medicaid eligibility authorized by the ACA and for the per capita caps. June 2017 Longer-Term Effects of the Better Care Reconciliation Act of 2017 on Medicaid Spending 3 OO CBO approximated the remainder of Medicaid limit on federal reimbursement would reduce outlays spending using the growth rate of such spending in because Medicaid spending, on a per-enrollee basis, the agency’s extended baseline. for non­ isabled children and nondisabled adults under d current law (after the changes to the Medicaid expansion As always, CBO has endeavored to develop budgetary population have been accounted for) would grow faster, estimates that are in the middle of the distribution of at 4.9 percent, than the CPI-M, at 3.7 percent. However, potential outcomes. Such estimates are inherently inexact for most enrollees who are disabled adults or age 65 or because the ways in which federal agencies, states, insur- older, that rate under current law would be 3.3 percent, ers, employers, individuals, doctors, hospitals, and other lower than the CPI-M plus 1 percentage point. The per affected parties would respond to the changes made by capita caps would have a small effect on spending for this legislation are all difficult to predict. those groups, even though the caps would not gener- ally be binding for them, because some shifting of costs Per Capita Caps for Medicaid among groups would probably occur, and spending for a The per capita caps under this legislation would con- particular group in a particular year could be affected. strain Medicaid spending in stages. Beginning in fiscal year 2020, the federal government would limit the In 2025 and beyond, the differences between spending amount of reimbursement it provides to states. That growth for Medicaid under current law and the growth limit would be set for a state by calculating the average rate of the per capita caps for all groups would be sub- per-enrollee cost of medical services for most enrollees stantial. CBO projects the growth rate of the CPI-U in who received full Medicaid benefits over eight consec- those years to be 2.4 percent. utive quarters of the state’s choosing between the first quarter of federal fiscal year 2014 and the third quarter Effects on Spending of 2017. Those enrollees would be in five specified cate- Over the next decade, CBO projects, a large gap would gories: the elderly, disabled adults, nondisabled children, grow between Medicaid spending under current law and adults made eligible for Medicaid by the ACA, and all under this bill. In later years, that gap would continue to other adults. The Secretary of Health and Human Ser- widen because of the compounding effect of the differ- vices would then inflate the average per-enrollee costs for ences in spending growth rates. CBO projects that the each state as described—for most nondisabled children growth rate of Medicaid under current law would exceed and nondisabled adults enrolled in Medicaid using the the growth rate of the per capita caps for all groups cov- CPI-M and for most enrollees who are disabled adults ered by the caps starting in 2025. or age 65 or older using the CPI-M plus 1 percentage point. Disabled children would be excluded from the per In CBO’s extended baseline, Medicaid spending is pro- capita caps and covered as under current law. Beginning jected to be 2.0 percent of GDP in 2017 and 2.4 percent in 2025, the Secretary would shift the inflation factor by 2036. The 35 percent reduction in that spending that for all groups to the CPI-U. The final limit on federal CBO estimates for 2036 under this legislation would reimbursement for each state starting in 2020 would be result in Medicaid spending of 1.6 percent of GDP.3 the average cost per enrollee for the five specified groups of enrollees, reflecting growth from the base period in 3. CBO generally presents long-term estimates as percentages of the relevant inflation factors multiplied by the number GDP and not in nominal dollars. In the agency’s judgment, of enrollees in each category. The amount of spending a presentation in nominal dollars can be misleading. The key problem is that a dollar today means something very different subject to those limits would be a large share of total from a dollar in the distant future, for at least two reasons. First, spending. the cumulative effect of changes in prices over a long period can be quite large, so a dollar amount in the distant future will have If a state spent more than the amount eligible for much lower value than the same dollar amount today. Second, federal reimbursement, the federal government would the population, the economy, and people’s incomes will all grow provide no reimbursement for spending over the limit. substantially over time, so a dollar amount in the distant future will be much smaller relative to the size of the economy or a By CBO’s projections for the 2017–2024 period, the person’s income than the same dollar amount today. 4 Longer-Term Effects of the Better Care Reconciliation Act of 2017 on Medicaid Spending June 2017 Under this legislation, after the next decade, states would continue to need to arrive at more efficient This document was requested by the Ranking Member methods for delivering services (to the extent feasi- of the Senate Committee on the Budget and the Ranking ble) and to decide whether to commit more of their Member of the Senate Committee on Finance. Jeffrey Kling prepared it with guidance from Holly Harvey and own resources, cut payments to health care providers with contributions from Xiaotong Niu, Lisa Ramirez- and health plans, eliminate optional services, restrict Branum, Michael Simpson, and Robert Stewart. Jessica eligibility for enrollment, or adopt some combination Banthin, Chad Chirico, Theresa Gullo, Mark Hadley, of those approaches. Over the long term, there would and David Weaver reviewed the document, John Skeen be increasing pressure on more states to use all of those edited it, and Casey Labrack prepared it for publication. tools to a greater extent. An electronic version is available on CBO’s website (www.cbo.gov/publication/52859). Keith Hall Director June 2017