Congressional Budget Office
Director's Blog

In a letter sent today to Congressman Paul Ryan, we described our analysis of the effects on prescription drug prices of certain provisions of the health legislation enacted in March.

That legislation requires manufacturers of brand-name drugs to provide new discounts and rebates for drugs purchased through Medicare and Medicaid, with the amount of those discounts and rebates based on the prices of the drugs. Manufacturers thus have an incentive to raise those prices to offset the costs of providing the new discounts and rebates, although other forces will limit their ability to do so.

For drugs covered by Medicare’s drug benefit, CBO estimated that those provisions of the legislation will raise the prices paid by pharmacies less any rebates paid to insurers by manufacturers by about 1 percent, on average. That increase in prices will make federal costs for Medicare’s drug benefit and the costs faced by some beneficiaries slightly higher than they would be in the absence of those provisions, while the new discounts will make the costs faced by other beneficiaries substantially lower.

For newly introduced drugs purchased through Medicaid, CBO estimated that those provisions will raise the prices paid by pharmacies by about 4 percent, on average. For currently available drugs purchased through Medicaid, which account for the bulk of projected Medicaid drug spending over the next decade, other provisions of law will constrain manufacturers’ ability to raise prices to offset the new rebates. The combined effect of the increase in prices and new rebates is that Medicaid will pay less for drugs, on average, than it would in the absence of those provisions.

The legislation contains several other provisions that will affect drug prices as well:

• It establishes an abbreviated pathway for approving “follow-on” biological drugs, and the resulting increase in competition will yield substantially lower prices for certain drugs. However, the affected drugs represent a relatively small share of projected total drug spending over the next decade, so CBO estimated that the average effect on drug prices will be modest—a reduction of about 2 percent in 2019.
• The legislation also imposes an annual fee on manufacturers and importers of brand-name drugs. CBO expects that the fee will probably increase the prices of drugs purchased through Medicare and the prices of newly introduced drugs purchased through Medicaid and other federal programs by about 1 percent. Those increases will be in addition to the ones described above that stem from the new requirements for discounts and rebates.
• Furthermore, the legislation expands drug coverage under the Medicare benefit (by gradually filling in the coverage gap, or “doughnut hole”) and extends insurance coverage to people who would otherwise have been uninsured (more than 30 million non-elderly people by the second half of the decade, according to CBO’s estimates). Both of those expansions in coverage could affect drug prices—but CBO estimated the expansions’ overall effects on insurance premiums and federal spending and not their effects on drug prices in particular.

The various provisions of the legislation will exert competing pressures on drug prices paid by private purchasers. CBO estimated that the overall impact on those prices would be small, on average.

Given the intricacy of the mechanisms for setting drug prices and the numerous features of the health care legislation that affected those prices, CBO’s estimates of the effects of the legislation on drug prices were necessarily uncertain. The actual effects could be larger or smaller than CBO estimated.

Today I am speaking to a conference sponsored by the Schaeffer Center for Health Policy and Economics at the University of Southern California. My remarks review CBO’s analysis of the economic effects of the health legislation enacted in March. Those effects can be divided into two pieces: the effects on the five-sixths of the economy outside the health sector, and the effects on the health sector itself.

For the economy outside the health sector, the most significant impact of the legislation will be through the labor market—but that impact will probably be small, as we discussed in The Budget and Economic Outlook: An Update, which CBO issued in August. We estimated that the legislation, on net, will reduce the amount of labor used in the economy by roughly half a percent, primarily by reducing the amount that people choose to work. That net effect reflects changes in incentives that operate in both directions: Some provisions of the legislation will discourage people from working more hours or entering the workforce, and other provisions will encourage them to work more. Moreover, many people will face the same incentives regarding work as they do under current law. The net reduction in the supply of labor is largely attributable to the substantial expansion of Medicaid and the provision of subsidies through the new insurance exchanges. Other provisions in the legislation will also affect the supply of labor or firms’ demand for certain types of workers, but their impact is likely to be small in the aggregate as well.

Turning to the health sector, one effect of the March legislation will be to increase the amount of health care delivered to people who would have been uninsured in the absence of the law. CBO projected that 32 million fewer people will be uninsured in 2019 because of the legislation. Previous research suggests that, all else equal, gaining insurance coverage will increase an individual’s demand for health services by about 40 percent. By itself, this would represent an expansion of the health sector of the economy equal to an increase in total health services of a few percent.

Another effect of the March legislation will be to reduce unnecessary spending on health care for people who would be insured with or without the legislation—but probably only to a very limited extent, at least during the next decade. In particular:

• The legislation changed the regulation of private health insurance. Those changes will reduce administrative costs and increase competition among insurers in the nongroup market, as CBO discussed last fall. The overall effect on spending from those changes will be a very small reduction.
• The legislation imposed an excise tax on employment-based health insurance policies whose premium exceeds a specified threshold. Most employers will probably respond by offering policies with premiums at or below the threshold; plans will achieve lower premiums by reducing spending, primarily through greater cost sharing (which will also lower total spending on health care) and more stringent benefit management. However, the impact will be muted in the near term because the excise tax will not take effect until 2018.
• The legislation reduced payments to many Medicare providers relative to what the government would have paid under prior law. Those reductions will impose greater pressure on providers to increase efficiency in the delivery of care. As a result of those cuts in payment rates and the existing “sustainable growth rate” mechanism that governs Medicare’s payments to physicians, CBO projects that Medicare spending will increase significantly more slowly during the next two decades than it has increased during the past two decades (per beneficiary, after adjusting for overall inflation). We wrote last spring that it is unclear whether such a reduction in the growth rate of spending could be sustained, and if so, whether it would be accomplished through greater efficiencies in the delivery of health care or through reductions in access to care or the quality of care.
• The legislation set up a number of experiments in delivery and payment systems to induce providers to offer higher-quality and lower-cost care. However, for a number of reasons, it is unclear how successful the experiments will be: There is little reliable evidence about exactly how to move Medicare in the directions that many experts recommend; much more work needs to be done on measuring the quality and value of care; how federal agencies will administer the law is not knowable at this point; and the legislation included significant limitations on the experimentation that will occur. As a result, CBO projects limited savings from the experiments in delivery and payment systems during the next decade (taking into account the possibility that savings could be more or less than we anticipate).
   

The Department of Veterans Affairs (VA) provides health care at little or no charge to more than 5 million veterans annually. VA is operating its medical care system and associated research program with a budget of $48 billion for 2010, a rise of 8 percent in nominal terms (without adjusting for inflation) from 2009. That budget grew at an average nominal rate exceeding 9 percent annually between 2004 and 2009. Unlike programs like Medicare and Medicaid, VA’s health care program receives its funding through the annual appropriation process. VA’s health care budget will face continued pressure over the next few years: Additional veterans are likely to seek care from VA, and cost increases in medical care are expected to continue to outpace cost increases for other goods and services.

In a report mandated in the Consolidated Appropriations Act, 2008, CBO examines, under two different scenarios discussed below, prospective demands on VA’s health care system and the potential budgetary implications of meeting veterans’ health care needs over the 2011–2020 period. CBO projects that the future costs for VA to treat enrolled veterans will be substantially higher than recent appropriations for that purpose. CBO finds that the cost (in 2010 dollars) of providing health care services to all veterans who would seek treatment at VA facilities would range from $69 billion to $85 billion in 2020, representing a cumulative increase of roughly 45 percent to 75 percent over the funding provided in 2010. The projections for both scenarios exceed CBO’s baseline projections for such health care spending, which assume that future appropriations are equal to the most recent appropriation with adjustments for inflation.

One group of veterans—those who have deployed or will deploy to overseas contingency operations (OCO), including those in Iraq and Afghanistan—will represent a growing share of enrollments in VA’s health care system over the next decade. However, the share of VA’s resources devoted to the care of those veterans is likely to remain small through 2020, in part because they are typically younger and healthier than the average VA enrollee.

Scenarios

To account for possible policy changes, uncertainty about the number of veterans who will be enrolled, and growth of medical expenditures per enrollee, CBO analyzed two scenarios to capture some of the range of possible outcomes. The scenarios differ in their assumptions about the number of enrollees in VA’s health care system and the costs of providing medical services.

Scenario 1. Scenario 1 was crafted under assumptions that generate lower resource requirements than Scenario 2. The assumptions about factors affecting enrollment include the following:

• VA’s eligibility, cost-sharing, and other policies at the beginning of 2010 remain in effect through the projection period. Those policies include the easing of enrollment restrictions that began in 2009 for certain veterans who have no compensable service-connected disabilities and whose income is no more than 10 percent above VA’s income thresholds.
• The number of troops deployed to overseas contingency operations drops to 30,000 by 2013 and remains at that number throughout the next decade.
• VA’s medical expenditures per enrollee for each priority group grow in nominal terms at slightly more than 5 percent per year, about the same rate as that anticipated in the general population over the decade.

Scenario 2. CBO developed the second scenario to illustrate potential policy changes and other outcomes that may result in higher resource needs for VA’s health care services. The assumptions for this scenario are as follows:

• VA changes its eligibility rules to allow veterans who have no compensable service-connected disabilities and whose income is no more than 30 percent above VA’s income thresholds to enroll.
• The number of troops deployed to overseas contingency operations declines more slowly than in Scenario 1, dropping to 60,000 by 2015 and remaining at that number through the rest of the decade.
• VA’s medical expenditures per enrollee for each priority group grow initially at the rate VA assumed in preparing the Administration’s 2011 budget request that was transmitted in February 2010 and, in subsequent years, at an annual rate that is about 30 percent higher than that anticipated in the general population.

Potential Future Costs

Under Scenario 1, CBO estimates that total enrollment would grow from 8.0 million in 2009 to more than 8.8 million by 2016—an increase of about 10 percent—but would edge down to 8.7 million in 2020. The costs of treating all enrolled veterans would be about $69 billion (in 2010 dollars) in 2020.

Under Scenario 2, enrollment would be 620,000 higher in 2020 than in Scenario 1, with 340,000 new enrollees resulting from VA’s further relaxation of the restrictions on enrollment and 280,000 from the higher troop deployments. The costs of treating all enrolled veterans would reach nearly $85 billion in 2020, or 22 percent more than under Scenario 1. The disparity between the growth rates of medical expenditures per enrollee in the two scenarios accounts for the lion’s share of the difference—$13 billion.

CBO also estimated the portion of VA’s costs that would be incurred to treat veterans of OCO. CBO estimates that between the time hostilities began and the end of 2020, VA would enroll a total of 1.4 million or 1.7 million OCO veterans under Scenarios 1 and 2, respectively. The annual costs (in 2010 dollars) of treating OCO veterans would increase from an estimated $2.0 billion in 2010 to $5.4 billion in 2020 under Scenario 1 and to $8.3 billion under Scenario 2. In either case, the cost to treat OCO veterans accounts for 10 percent or less of VA’s costs in 2020.

This study was prepared by Heidi Golding of CBO’s National Security Division.
 

Four years ago, Medicare began providing outpatient prescription drug benefits for senior citizens and people with disabilities. Known as Part D, the program uses private plans to provide coverage for prescription drugs to enrollees. Those plans negotiate payment rates with pharmacies and rebates from drug manufacturers while competing for enrollees. Such competition provides incentives for plans to control their costs; one important way in which plans seek to control costs is by encouraging the use of generic drugs. A CBO study released today assesses how successful plans have been in encouraging the use of generic drugs and the potential for savings from the additional use of such drugs.

In 2007, total payments to plans and pharmacies from the Part D program and its enrollees were about $60 billion. The total number of prescriptions filled was about 1 billion, of which 65 percent were filled with generic drugs, 5 percent were filled with multiple-source brand-name drugs (brand-name drugs that are also available in generic versions), and 30 percent were filled with single-source brand-name drugs (brand-name drugs for which no chemically equivalent generic versions are available). Even though a majority of prescriptions were filled with generic drugs, their lower prices meant that those prescriptions accounted for only 25 percent of total prescription drug costs.

Potential Savings from Generic Substitution. To control their costs, plans encourage enrollees to switch from brand-name drugs to their less expensive generic equivalents, a practice known as generic substitution. CBO estimates that:

• Dispensing generic drugs rather than their brand-name counterparts reduced total prescription drug costs in 2007 by about $33 billion, meaning that total payments to plans and pharmacies from the Part D program and its enrollees would have been about $93 billion—or 55 percent higher—if no generics had been available.
• The potential for additional savings from increased generic substitution is comparatively small, totaling less than $1 billion.

Potential Savings from Therapeutic Substitution. In one form of a practice known as therapeutic substitution, plans can also encourage enrollees to switch from a brand-name drug to the generic form of a different drug that is in the same therapeutic class (that is, a drug designed to treat the same medical condition). To assess the potential for such savings, CBO examined seven therapeutic classes identified by the Medicare program as providing opportunities for such substitution. CBO finds that:

• If all of the single-source brand-name prescriptions in those seven classes had been switched to generic drugs from the same class, prescription drug costs would have been reduced by $4 billion in 2007.
• Savings from therapeutic substitution to generic drugs could have been much higher than $4 billion to the extent that other classes of drugs also would have presented options for substitution. The seven classes that CBO evaluated represented only about 15 percent of the cost of single-source brand-name drugs under Part D. However, the potential savings could have been lower than $4 billion because in many cases it would have been medically inappropriate to switch to a generic form of a therapeutically similar drug.

Policymakers would face several challenges in developing tools to achieve any additional savings from the expanded use of generic drugs—particularly in the case of therapeutic substitution. About half of Part D spending is on behalf of enrollees who have lower incomes and thus qualify for additional subsidies. Policies that used financial incentives to steer enrollees toward certain drugs might not be effective for that population because Medicare pays nearly all of their costs.

This study was prepared by Julie Somers of CBO’s Microeconomic Studies Division.
 

Over the past two decades, the adult population in the United States has, on average, become much heavier. From 1987 to 2007, the fraction of adults who were overweight or obese increased from 44 percent to 63 percent; almost two-thirds of the adult population now falls into one of those categories. The share of obese adults rose particularly rapidly, more than doubling from 13 percent to 28 percent. That sharp increase in the fraction of adults who are overweight or obese poses an important public health challenge. Those adults are more likely to develop serious illnesses, including coronary heart disease, diabetes, and hypertension. As a result, that trend also affects spending on health care.

A CBO issue brief released this afternoon examines changes over time in the distribution of adults among four categories of body weight: underweight, normal, overweight, and obese. Those categories are defined in federal guidelines using a measure known as the body-mass index—a measure that standardizes weight for height. CBO analyzes how past changes in the weight distribution have affected health care spending per adult and projects how future changes might affect spending going forward.

According to CBO’s analysis of survey data, health care spending per adult grew substantially in all weight categories between 1987 and 2007, but the rate of growth was much more rapid among the obese (defined as those with a body-mass index greater than or equal to 30). Spending per capita for obese adults exceeded spending for adults of normal weight by about 8 percent in 1987 and by about 38 percent in 2007. That increasing gap in spending between the two groups probably reflects a combination of factors, including changes in the average health status of the obese population and technological advances that offer new, costly treatments for conditions that are particularly common among obese individuals.

A relatively simple set of calculations using survey data indicates that if the distribution of adults by weight between 1987 and 2007 had changed only to reflect demographic changes, such as the aging of the population, then health care spending per adult in 2007 would have been roughly 3 percent below the actual 2007 amount. Similar calculations for three different scenarios show the potential effects of different trends in adults’ body weight on future health care spending. In all cases, CBO assumes per capita health care spending will continue to grow faster for adults whose weight is in the above-normal categories. CBO’s assumptions and findings for the scenarios are as follows:

• First, CBO assumed that there will be no future changes in the distribution of adults by body weight, and the prevalence of obesity will remain at the 2007 rate of 28 percent. If so, per capita spending on health care for adults would rise by 65 percent—from $4,550 in 2007 to $7,500 in 2020—largely as a result of rapidly increasing health care spending for all adults regardless of weight. (All dollar figures are in 2009 dollars.)
• Alternatively, CBO assumed a rising prevalence of obesity, matching recent trends. In that scenario, the prevalence of obesity would rise to 37 percent by 2020, and per capita spending would increase to $7,760—about 3 percent higher than spending in the first scenario.
• CBO also assessed the impact of a possible reversal in recent trends. In that scenario, the prevalence of obesity among adults would drop to 20 percent by 2020. Per capita spending would increase to $7,230—about 4 percent lower than spending in the first scenario.

Because lower rates of obesity are associated with better health and lower health care spending per capita, there is considerable interest in devising policies that would reduce the fraction of the population that is obese. However, the literature to date suggests that the challenges in reducing the prevalence of obesity are significant. How reducing obesity would affect both total (rather than per capita) spending for health care and the federal budget over time is not clear, for reasons discussed in the brief.

This issue brief was prepared by Noelia Duchovny of CBO’s Health and Human Resources Division and Colin Baker (formerly of CBO).

This morning CBO released a letter to Chairman Fortney Pete Stark analyzing a proposal to add a “public plan” to the options available through the health insurance exchanges that will be established under the recently enacted health care legislation—the Patient Protection and Affordable Care Act, or PPACA (Public Law 111-148).
 
Under the proposal, the Department of Health and Human Services would establish and administer a public health insurance plan and would charge premiums to fully cover its costs for benefit payments and administrative expenses. The plan’s payment rates for physicians and other practitioners would be based on Medicare’s current rates but would not be subject to the future reductions required by Medicare’s sustainable growth rate formula; instead, those rates would initially increase by 5 percent and then would rise annually to reflect estimated increases in physicians’ costs. The plan would pay hospitals and other providers the same amounts that would be paid under Medicare, on average, and would establish payment rates for prescription drugs through negotiation. Health care providers would not be required to participate in the public plan in order to participate in Medicare.

CBO estimates that the public plan’s premiums would be 5 percent to 7 percent lower, on average, than the premiums of private plans offered in the exchanges. The differences between the premiums of the public plan and the average premiums of private plans would vary across the country because of geographic differences in the plans’ relative costs. Those differences in premiums would reflect the net impact of differences in the factors that affect all health insurance premiums, including the rates paid to providers, administrative costs, the degree of benefit management applied to control spending, and the characteristics of the enrollees.

CBO estimates that roughly one-third of the people obtaining coverage through the insurance exchanges would enroll in the public plan. We anticipate that, under the proposal, about 25 million people would purchase coverage individually through the exchanges on average during the 2017–19 period; in addition, about 13 million people would obtain employment-based coverage through the exchanges—so total enrollment in exchange plans would be about 38 million. Total enrollment in the public plan would thus be roughly 13 million. Given all of the factors at work, however, those estimates are subject to an unusually high degree of uncertainty. 
 
CBO and the staff of the Joint Committee on Taxation (JCT) estimate that the proposal would reduce federal budget deficits through 2019 by about $53 billion. That estimate includes a $37 billion reduction in exchange subsidies and a $27 billion increase in tax revenues that would result because a greater share of employees’ compensation would take the form of taxable wages and salaries (rather than nontaxable health benefits). Those changes would be partly offset by an $11 billion increase in costs for providing tax credits to small employers. (The proposal would have minimal effects on other outlays and revenues related to the insurance coverage provisions of PPACA.)

The bulk of those budgetary effects would occur in the second half of the decade; the savings estimated for 2019 are about $14 billion. Although CBO and JCT have not yet extended to 2020 the models they use to estimate insurance coverage, the proposal would probably reduce the federal budget deficit by about $15 billion in that year, bringing the total budgetary savings through 2020 to about $68 billion. As discussed in CBO’s letter, those estimates are smaller than figures that have been previously reported regarding the savings from establishing a similar public plan because those previous estimates were related to legislation that differed in a number of ways from what was enacted.

On Wednesday I spoke at a conference on the health care system hosted by the Institute of Medicine. My presentation dealt with health care costs and the federal budget. The central challenge is straightforward and stark: The rising costs of health care will put tremendous pressure on the federal budget during the next few decades and beyond.

In CBO’s judgment, the health legislation enacted earlier this year does not substantially diminish that pressure. In fact, CBO estimated that the health legislation will increase the federal budgetary commitment to health care (which CBO defines as the sum of net federal outlays for health programs and tax preferences for health care) by nearly $400 billion during the 2010-2019 period. Looking further ahead, CBO estimated that the legislation would reduce the federal budgetary commitment to health care in the following decade—if the provisions of the legislation remain unchanged throughout that entire period. CBO also estimated that the legislation will reduce budget deficits by about $140 billion during the 2010-2019 period and by an amount in a broad range around one-half percent of gross domestic product (GDP) during the following decade—again, under the assumption that the legislation remains in force as enacted.

The projected reductions in budget deficits and in the federal budgetary commitment to health care during the decade beyond the 10-year budget window are steps in the direction of sustainable fiscal policy. However, they are small steps relative to the length of the journey that will be needed to achieve sustainability. If the tax cuts enacted in 2001 and 2003 are extended, the alternative minimum tax is indexed for inflation, and no other changes are made to current laws regarding taxes and spending, the budget deficit in 2020 would be about 6 percent of GDP and rising. Because federal health care programs make up a large share of the federal budget, putting that budget on a sustainable path would almost certainly require a significant reduction in the growth of federal spending on health care relative to the amounts projected under current law (including this year’s health legislation).

In considering the opportunities for achieving that reduction in spending growth, there are grounds for both optimism and pessimism. On the upside, there is considerable agreement that a substantial share of current spending on health care contributes little if anything to people’s health, and providers and health analysts are making significant efforts to make the health system more efficient. On the downside, it is not clear what specific policies the federal government can adopt to generate fundamental changes in the health system; that is, it is not clear what specific policies would translate the potential for significant cost savings into reality. Moreover, efforts to reduce costs substantially would increase the risk that people would not get some health care they need or would like to receive.

CBO and the staff of the Joint Committee on Taxation (JCT) have prepared an estimate of the budgetary effects of H.R. 4213, the American Jobs and Closing Tax Loopholes Act, as posted on the Web site of the Committee on Ways and Means on May 20, 2010. CBO and JCT estimate that the legislation would increase budget deficits by about $123 billion for fiscal years 2010 and 2011, by about $141 billion over the 2010-2015 period, and by about $134 billion over the 2010-2020 period.

The legislation would reduce federal revenues by about $23 billion in 2010 and 2011, but would lead to a net increase in revenues totaling about $40 billion over the 2010-2020 period. The revenue effects are the net result of provisions that both increase and decrease revenues. Revenue reductions would result mainly from the extension for one year of various tax provisions that expired at the end of 2009, including the tax credit for research and experimentation expenses, and the 15-year straight-line cost recovery method allowed for specified leasehold, restaurant, and retail improvements. Revenue increases would result from a number of provisions including taxing so-called “carried interest,” altering various rules that corporations use to calculate their foreign tax credits and foreign-source income, and modifying the employment tax treatment of income earned by individuals in professional service businesses.

The legislation would increase outlays by $174 billion over the 2010-2020 period, mostly between 2010 and 2015. The bill would extend benefits under the unemployment insurance program, at a total cost of about $47 billion, and it would extend (for an additional six months) the increase in the federal share of Medicaid costs that was originally enacted in the American Recovery and Reinvestment Act of 2009, at a cost of about $24 billion. The legislation would also amend the system for payments to physicians under Medicare, at an estimated cost of $63 billion over the 2010-2020 period.

Under the new system for Medicare payments to physicians, payment rates would increase by 1.3 percent on June 1, 2010, and by another 1.0 percent on January 1, 2011; under current law, those payment rates would fall by about 21 percent on June 1 and by another 6 percent on January 1, 2011. During 2012 and 2013, a new formula would increase or freeze payment rates to physicians depending on the type of service performed and on whether they participate in a new practice arrangement established by the Patient Protection and Affordable Care Act passed earlier this year. Payment rates would be reduced by about 35 percent in 2014 to approximately the levels they would have been without the changes made between 2010 and 2013. For years after 2014, CBO estimates that payment rates would decline by an average of about 2 percent per year, keeping spending close to the amounts expected under current law in those years.
 

Two days ago CBO provided some additional information about the potential effects of H.R. 3590, the Patient Protection and Affordable Care Act (PPACA, Public Law 111-148), on discretionary spending (that is, spending that is funded through the annual appropriation process). In response to questions from Congressional staff members, CBO released a further explanation of those figures yesterday.

The potential discretionary costs identified two days ago include many items whose funding would be a continuation of recent funding levels for health-related programs or that were previously authorized and that PPACA would authorize for future years. (For example, those potential costs include $39 billion authorized for Indian health services that already receive appropriations every year.) CBO estimates that the amounts authorized for those items exceed $86 billion over the 10-year period (out of the roughly $105 billion total shown in the table provided yesterday). Thus, CBO’s discretionary baseline, which assumes that 2010 appropriations are extended with adjustments for anticipated inflation, already accounts for much of the potential discretionary spending under PPACA. That is one of the reasons that potential discretionary effects are shown separately from effects on revenues and mandatory spending in CBO’s cost estimates.
 

Today CBO provided some additional information about the potential effects of H.R. 3590, the Patient Protection and Affordable Care Act (PPACA, Public Law 111-148), on discretionary spending (that is, spending that is funded through the annual appropriation process). This information updates and expands upon the analysis of potential discretionary spending under PPACA that CBO issued on March 15, 2010. By their nature all such potential effects on discretionary spending are subject to future appropriation actions, which could result in greater or smaller costs than the sums authorized by the legislation.

CBO does not have a comprehensive estimate of all of the potential discretionary costs associated with PPACA, but we can provide information on the major components of such costs. Those discretionary costs fall into three general categories:

• The costs that will be incurred by federal agencies to implement the new policies established by PPACA, such as administrative expenses for the Department of Health and Human Services and the Internal Revenue Service for carrying out key requirements of the legislation.
• Explicit authorizations for future appropriations for a variety of grant and other program spending for which the act identifies the specific funding levels it envisions for one or more years. (Such cases include provisions where a specified funding level is authorized for an initial year along with the authorization of such sums as may be necessary for continued funding in subsequent years.)
• Explicit authorizations for future appropriations for a variety of grant and other program spending for which no specific funding levels are identified in the legislation. That type of provision generally includes legislative language that authorizes the appropriation of “such sums as may be necessary,” often for a particular period of time.

CBO estimates that total authorized costs in the first two categories probably exceed $115 billion over the 2010-2019 period. We do not have an estimate of the potential costs of authorizations in the third category.

CBO previously issued an estimate of the direct spending and revenue effects of PPACA, in combination with the Reconciliation Act of 2010 (Public Law 111-152), which amended it.  (Direct spending effects are those that do not require subsequent appropriation action.)  CBO estimated that those two laws, in combination, would produce a net reduction in federal deficits of $143 billion over the 2010-2019 period as a result of changes in direct spending and revenues.