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Health Costs Continue to Slow, Improving Budget Outlook

With health care cost growth continuing to slow, the Congressional Budget Office (CBO) now projects that federal health spending will be nearly $700 billion less over the 2011-2020 period than what CBO projected in January 2010 — even with the subsequent enactment of health reform (see figure).


Lower projected health care spending has markedly improved the budget outlook, with CBO projecting that federal budget deficits through 2025 will be about $400 billion less than it projected in January.

“The largest factor underlying that reduction,” CBO says of its lower deficit projections, “is a downward revision in projected growth in premiums for private health insurance, reflecting the fact that spending by private health insurers on health care and administration rose less in 2013 (the most recent year for which data are available) than in preceding years and by much less than [CBO and the Joint Committee on Taxation (JCT)] had expected for 2013.”

This slowdown in health costs affects the budget outlook in three major ways.

  • First, slower growth in health insurance premiums will reduce the cost of the subsidies available to low- and moderate-income people who purchase coverage in the health insurance marketplaces.
  • Second, lower premiums will result in higher taxable wages for workers, thereby increasing income and payroll tax revenues.
  • Third, because premiums will be lower, fewer workers will be enrolled in employer-sponsored health insurance plans that would potentially be subject to the excise tax on high-cost plans (the “Cadillac tax”) that takes effect in 2018. CBO and JCT now estimate that revenues from the excise tax will be 41 percent lower through 2025 than they estimated previously.

Even if cost growth remains moderate, federal health spending will keep rising as more baby boomers become eligible for Medicare and Medicaid.  Making the health care system more efficient thus remains a major budget challenge.  But CBO’s latest projections confirm that we’ve already made substantial progress.