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CBO: Ryan Proposal Would Cut Health Care Spending

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A Republican lawmaker’s ideas for changing health insurance tax rules and federal health and retirement programs might be hard on patients, but they could be great for the budget deficit, according to congressional budget analysts.

The analysts, at the Congress Budget Office, have come to those conclusions after evaluating the Roadmap for America’s Future Act of 2010, a draft bill developed by Rep. Paul Ryan, R-Wis., that would make many major changes in government programs and government spending rules.

- Health Insurance: In 2011, the current tax exclusion for employment-based health insurance would be replaced by a refundable tax credit for the purchase of health insurance, either through an employer or on an individual basis.

The tax credit initially would be set at $2,300 per adult and $1,700 per child, not to exceed $5,700 per tax-filing unit.

- Social Security: The Social Security program would be modified for future beneficiaries by reducing retirement benefits below those scheduled under current law for many workers who are age 55 or younger in 2011. The reductions would be smaller for lower-income workers.

- Individual Accounts: In 2012, workers ages 55 and younger could participate in voluntary individual accounts funded with payroll taxes. The government would guarantee a minimum rate of return equal to the inflation rate.

- Medicare and Medicaid: Medicare and Medicaid would be completely revamped.

- Other Spending: From 2010 through 2019, nondefense discretionary spending would be frozen at 2009 levels in nominal terms. The bill would continue to restrict most growth in spending after 2020.

If Congress adopted the bill as written and it were implemented as written, it “would result in less federal spending for Medicare and Medicaid as well as lower tax revenues than projected” if current rules prevail, CBO Director Douglas Elmendorf writes in a letter to Ryan. “Federal spending for Social Security would be slightly higher than under CBO’s alternative fiscal scenario for much of the projection period. On balance, those changes would reduce federal budget deficits and the federal debt.

“Primary spending, or federal outlays, excluding interest, would fall to 19% of gross domestic product in 2020, from 26% in 2009, and, by 2080, the proposal would produce a 5% annual GDP surplus.”

As a result of the proposed changes in Medicare, “beneficiaries would … be likely to purchase less comprehensive health plans or plans more heavily managed than traditional Medicare, resulting in some combination of less use of health care services and less use of technologically advanced treatments than under current law,” Elmendorf writes. “Beneficiaries would also bear the financial risk for the cost of buying insurance policies or the cost of obtaining health care services beyond what would be covered by their insurance.”

The commercial health insurance tax changes would “decrease the number of uninsured people relative to the number under current law,” Elmendorf writes. “That decrease would occur because the move to a fixed refundable tax credit would have the effect of increasing the subsidy for health insurance to lower-income people, who are also most likely to be uninsured. At the same time, reducing the subsidy for higher-income people would have little effect on insurance coverage because they would probably purchase insurance even with a reduced subsidy.”

Private individuals might spend somewhat more on health care, but the government would spend a far smaller percentage of GDP on health care than if current rules prevail, Elmendorf predicts.

“It is difficult to predict how such a sweeping change in federal spending on health care
would affect the behavior of insurers, health providers, and individual consumers,” Elmendorf writes. “In particular, how spending would be reduced for physicians, hospitals, advanced technological
treatments, drugs, or other health care is uncertain. However, it is likely that fewer services would be provided and treatments would be less technologically advanced compared with the circumstances that would exist under the alternative fiscal scenario.”