More Good News on the Deficit, This Time Because of Private Insurance Health Premiums

Estimates for government health care spending keep coming down.

A few months, ago, we wrote about how a slowing trend in Medicare spending had led federal budget forecasters to make drastic reductions in their estimates of the program’s costs. On Monday, they made similar cuts in their forecast of what the federal government will spend on private insurance premiums.

The revisions reflect growing evidence that health care spending in the country — which has traditionally grown much more quickly than the overall economy — is entering a new, more moderate era. It is still rising, but not very much any more.

That could eventually be not only a boon for consumers, but it could also have big implications for the federal budget: If the Congressional Budget Office is right, the amount the federal government pays for health insurance in the coming years will be hundreds of billions of dollars lower than it recently forecast, meaning a much smaller federal deficit.

The precise mix of factors behind the slowdown is still not entirely understood, but reduced spending growth has been observed almost across the board in health care. Medical price inflation has fallen, while the use of certain types of costly care — like hospitalizations — has declined. The changes most likely reflect some mix of consumer behavior (as people try avoid more expensive kinds of care) and a change in how doctors and hospitals practice medicine (as they try to reduce waste and errors).

Insurance companies are also probably contributing to those changes. To reduce costs, more have switched to products that either charge customers higher deductibles and co-payments for their care or that limit the number of doctors and hospitals they can see. The health care reform law, known popularly as Obamacare, may also be playing a supporting role by encouraging more efficient care, though most of its cost-saving programs are still small and relatively new.

Over the last few years, the Congressional Budget Office has been gradually lowering its estimates of how much Medicare, the government insurance program for the elderly and disabled, will spend to care for people. Taken together, the size of those reductions is huge — dwarfing nearly any other deficit reduction proposal under discussion in Washington today.

Today’s announcement about private insurance amounts to an effective deficit reduction on a similar scale, but it came all at once. Precise math is hard, given how the budget office’s estimates are provided, but it appears that the federal government is now estimating it will spend about $300 billion less over the next 10 years because of lower health insurance premiums.

Even in federal budget terms, $300 billion is a lot of money. Eliminating the tax deduction for charitable giving, by comparison, would provide $213 billion in additional revenue, according to a recent budget office estimate. Eliminating the human space exploration program would save about $77 billion. Ending subsidies for Amtrak would save $14 billion. And unlike any of those cuts, the health spending slowdown is occurring largely without overt government cuts or explicit reductions in needed health care services. The government will save the money by enjoying the benefits of a more efficient health care system.

The federal government pays for private health insurance in two major ways. It subsidizes the premiums of people who get their insurance through work by making that portion of their pay tax-free. And it helps pay the cost of premiums for middle-income people who buy their own insurance on Obamacare’s insurance marketplaces, on a sliding scale according to income. When private insurance gets more expensive, as it typically does, the federal government must pay more for its share of the premiums.

What the budget office said Monday is that private insurance premiums are going to grow much more slowly than it previously estimated. That means that the government will be paying out less to subsidize people’s private premiums in the marketplaces — and will be collecting a greater fraction of workers’ total compensation in income taxes as people get paid relatively more in cash and less in health insurance.

The insurance premiums in many states are being challenged in a case currently before the Supreme Court. The budget office estimates assume the court will leave the law unchanged.

There are now a few years’ worth of evidence that private health insurance premiums are growing slowly. Recent surveys of employers who offer health coverage have shown record-low growth rates. Prices in the Obamacare marketplaces this year grew far more slowly than most people expected. And a big government report, out in December, showed comprehensive evidence that spending between 2012 and 2013 was essentially flat.

According to Monday’s report, the government will end up paying about $210 billion less in a tax exclusion for employer-based insurance plans, and about $209 billion less in subsidies for customers buying insurance on the new Obamacare marketplaces. A smaller deficit means less spent in repaying the federal debt.

There are some other factors in the Obamacare reduction; the savings can’t be entirely explained by the premium reductions. And there are a few related phenomena that cut the other way: Lowered premiums also mean that fewer companies will end up paying a “Cadillac tax” on expensive insurance under the Obamacare law, an estimated loss of $62 billion. And as some companies stop offering insurance to their workers, the savings to the federal government will get smaller.

The change, of course, means that the health reform law is now forecast to cost the government substantially less than originally expected. The net savings to the program could be about $142 billion over 10 years.

The growing cost of health care has been effectively erasing pay raises for workers. It’s also driving up the federal deficit and crowding out other state budget obligations, like education. The budget offices’s estimates are just that — estimates. But they point to a welcome economic trend: one in which health care won’t keep gobbling up more and more of the money needed for other priorities.