Does ObamaCare Reduce Health Care Spending?

The short answer is no.


Yesterday, former Congressional Budget Office and Office of Management and Budget Director Peter Orszag had a piece in The New York Times claiming that the Patient Protection and Affordable Care Act of 2010 is an essential element to keeping future health care costs down. Worried that Republicans will make good on Election Night vows to repeal ObamaCare, Orszag's basic argument in summed up in his commentary's headline: "To Save Money, Save the Health Care Act."

He writes: "Sure, the health care law is not perfect, but it would cut the nation's long-term fiscal imbalance by a quarter and reduce the projected deficit within Medicare by three-quarters. That may seem fanciful, given how distorted the public discussion has become. But that's what the projections show, as long as Congress sticks to its guns and the Obama administration does a good job carrying out the provisions of the law."

However, Orszag's article amounts to little more than wishful thinking. Using Congressional Budget Office (CBO) data, the chart below shows that the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 have left the cost curve of federal healthcare spending virtually unchanged over the next 25 years.

The data for this chart comes from the June 2010 Long-Term Budget Outlook and the Cost Estimate for the Reconciliation of Act 2010. As we can see, the chart compares future projected federal spending on healthcare with and without the projected effects of the Affordable Care Act. In red, CBO's projected federal healthcare costs without the effects of the Affordable Care Act; in blue, CBO's projected federal healthcare costs with the healthcare legislation. The two lines closely follow one another, with currently legislated health care spending (which includes the effects of the health care legislation) dominating the baseline healthcare spending (absent the effects of the healthcare bill).

The CBO finds that the effect of the healthcare legislation has been to increase government spending by $3.8 trillion between 2010 and 2020. From 2020 to 2035, federal spending under the two projections are equal percentages of GDP. If Orszag is arguing that the real cost-containment provisions kick in around 2036, such futuristic projections are simply not worth taking seriously.

Assuming the very unlikely scenario that every cut in the Affordable Care Act is enacted, the law contains provisions that have conflicting effects on net federal spending. On the one hand, it increases spending by increasing the federal commitment to Medicaid and increasing federal subsidies for private insurance; on the other hand, federal payments to Medicare and private insurance are legislated to decrease.

(Article continues below the video, "3 Reasons Health Care Reform Won't Cut the Deficit by One Thin Dime.")

Indeed, the history of Medicare reimbursement rates demonstrates the fantasy at work in many official health care cost projections, including the CBO data seen above. It assumes that Medicare's sustainable growth rate mechanism, which would have reduced physician payments by 21 percent in 2010 alone, actually takes effect. Medicare reimbursement rates are legislated to decline over time but basically never do. Instead, Congress routinely enacts what's known as the "doc fix," or upward payment adjustments. As Politico reported in May, "In 2010 alone, Congress has already headed off three scheduled payment drops—in January, March and April." In fact, as the CBO notes, Congress has kicked the can down the road on payment reductions yet again, putting off the reduction in payment rates until at least December 2010.

ObamaCare doesn't reduce medical costs under even the rosiest of scenarios (that is, projections that take seriously all its creators' assumptions). What we can be certain of is that this legislation increases the amount of money taxpayers will be forced by law to pay for health insurance to the tune of $420 billion over the next 10 years. Claims about ObamaCare's deficit-reduction effects depend on new taxes growing even faster than new spending. Despite the persistent claims of Peter Orszag and other defenders of the president's health care legislation, ObamaCare has nothing to do with cutting costs.

Veronique de Rugy is a Reason columnist and an economist at the Mercatus Center.