	Background

PPACA provided for additional health care coverage options for millions  of lower income individuals through the expansion of eligibility for the  Medicaid program and the creation of health insurance exchanges where  eligible individuals can qualify for federal subsidies to purchase private  health insurance coverage. In both the January 2010 and Fall 2010 Baseline  Extended simulations, spending for Medicaid and exchange subsidies  follows CBO’s baseline projections for the first 10 years and is then  based on growth in spending for these programs consistent with  CBO’s long-term assumptions for the number and age composition of  enrollees and the Medicare Trustees’ intermediate assumptions for  excess cost growth. Effect of PPACA on the Long-Term Fiscal Outlook Depends on Whether Cost- Containment Mechanisms are Sustained

The effect of PPACA on the long-term fiscal outlook depends largely on  whether elements designed to control cost growth are sustained. Overall,  there was notable improvement in the longer-term outlook after the  enactment of PPACA under our Fall 2010 Baseline Extended simulation,  which, consistent with federal law at the time the simulation was run,  assumed the full implementation and effectiveness of the cost- containment provisions over the entire 75-year simulation period. In  contrast, the long-term outlook in the Fall 2010 Alternative simulation  worsened slightly compared to our January 2010 simulation. This is  largely due to the fact that cost-containment mechanisms specified in  PPACA are assumed to phase out over time while the additional costs  associated with expanding federal health care coverage remain. The net effect of changes to spending and revenue on the federal budget  were relatively small in the first few decades in both simulations, and the  improvements in the Baseline Extended simulations from January 2010 to  Fall 2010 do not significantly slow the growth in debt held by the public  until the outyears. The effect of PPACA on the long-term fiscal outlook is seen largely  through changes in federal spending on major federal health care  programs. The Trustees, CBO, and OACT have questioned whether the cost- containment mechanisms enacted in PPACA can be sustained over the  long term, due in part to the challenges in sustaining increases in health  care productivity. As a result, total federal health care spending was higher in the Fall 2010  Alternative simulation than in the January 2010 simulation. While some of  this uncertainty is related to the implementation and effectiveness of  provisions of PPACA, there is also broader uncertainty about the future  underlying rate of health care cost growth before cost-containment  mechanisms are applied. Enrollment in the major federal health care programs is expected to  continue to increase in the near term due both to the aging of the U.S.  population and to expanded eligibility. As such, a key driver of federal spending for both  Medicare and Medicaid is the aging of the population. Growth in Health Care Spending Per Capita is a Key Driver of Federal Health Care Spending Over the Long Term

The share of the federal budget devoted to Medicare and Medicaid has  increased over the past several decades due not only to increases in  enrollment but also due to increases in health care spending per enrollee. The extent to which the annual growth rate of health care spending per  capita exceeds the annual growth rate of potential GDP per capita  adjusted for demographic characteristics, is referred to as excess cost  growth. Figure 8 shows that slowing the rate of excess cost growth could slow the  buildup of debt held by the public considerably and help put the budget on  a more sustainable path. In this simulation, revenue and  spending follow historic trends and past policy preferences. Technological Change Has Been the Largest Driver of Health Care Cost Growth, and with Health Insurance Coverage and Increasing Income, is Likely the Largest Source of Uncertainty for Health Care Cost Projections

		Technological Change Accounts for about 50 Percent of Health Care Cost Growth

A growing U.S. population directly increases overall health care spending;  however, the causes of rising health care cost per capita are more difficult  to identify. There is general agreement among  researchers about the factors that drive health care cost growth and the  relative size of influence of this growth, although each factor has a unique  mechanism to affect health care costs, and therefore, a different relative  influence on health care cost growth (see fig. Key Uncertainties for Health Care Cost Projections are Technological Change, Increases in Income, and Health Insurance Expansions

Although there is some consensus among researchers about which  factors drive health care cost growth, there is considerable uncertainty  about the magnitude of impact of each factor on future health care cost  growth. Together, the expected volatility in future GDP  growth and possible changes in the distribution of income among  Americans leads us to believe that there is some uncertainty surrounding  the size of the impact that increases in income may have on future health  care cost growth, and that the uncertainty is larger for the more distant  future. Concluding Observations

Comparing the results of our simulations before and after the enactment  of PPACA helps to illustrate the important role that efforts to slow the  growth in health care spending have in improving the long-term fiscal  outlook. Reducing health care cost growth alone, however, is not  sufficient to put the federal budget on a sustainable path. Our Baseline Extended simulation illustrates  the long-term outlook assuming current law is generally continued, while  the Alternative simulation illustrates the long-term outlook assuming  historical trends and policy preferences are continued. For example,  after the enactment of the Patient Protection and Affordable Care Act  (PPACA), consistent with CBO, we included federal spending for CHIP  and federal exchange subsidies in the same category with Medicaid.
Why GAO Did This Study

GAO regularly prepares long-term federal budget simulations under different assumptions about broad fiscal policy decisions. GAO's Baseline Extended simulation illustrates the long-term outlook assuming current law at the time the simulation was run is generally continued, while the Alternative simulation illustrates the long-term outlook assuming historical trends and past policy preferences continue. Under either set of assumptions, these simulations show that the federal budget is on an unsustainable fiscal path driven on the spending side by rising health care costs and the aging of the population. PPACA provides for expanded eligibility for Medicaid and federal subsidies to help individuals obtain private health insurance and includes provisions designed to slow the growth of federal health care spending.
GAO was asked to describe the longterm effects of PPACA on the federal fiscal outlook under both its Baseline Extended and Alternative simulations; how changes in assumptions for federal health care cost growth might affect the outlook; and the key drivers of health care cost growth and how the uncertainty associated with each may influence future health care spending. To do this, GAO compared the results of its long-term fiscal simulations from before and after the enactment of PPACA and examined the key factors that contributed to changes in revenue and spending components; reviewed trends in health care cost growth and performed a sensitivity analysis varying rates of excess cost growth; and reviewed literature describing key drivers of health care cost growth and areas of uncertainty related to projections of federal health care costs.

What GAO Found

The effect of the Patient Protection and Affordable Care Act (PPACA), enacted in March 2010, on the long-term fiscal outlook depends largely on whether elements in PPACA designed to control cost growth are sustained. There was notable improvement in the longer-term outlook after the enactment of PPACA under GAO's Fall 2010 Baseline Extended simulation, which assumes both the expansion of health care coverage and the full implementation and effectiveness of the cost-containment provisions over the entire 75-year simulation period. However, the federal budget remains on an unsustainable path. Further, questions about the implementation and sustainability of these provisions have been raised by the Centers for Medicare & Medicaid Services' Office of the Actuary and others, due in part to challenges in sustaining increased health care productivity. The Fall 2010 Alternative simulation assumed cost containment mechanisms specified in PPACA were phased out over time while the additional costs associated with expanding federal health care coverage remained. Under these assumptions, the long-term outlook worsened slightly compared to the pre-PPACA January 2010 simulation.
Federal health care spending is expected to continue growing faster than the economy. In the near term, this is driven by increasing enrollment in federal health care programs due to the aging of the population and expanded eligibility. Over the longer term, excess cost growth (the extent to which growth of health care spending per capita exceeds growth of income per capita) is a key driver. Slowing the rate of health care cost growth would help put the budget on a more sustainable path. There is general agreement that technological advancement has been the key factor in health care cost growth in the past, along with the effects of expanding health insurance coverage and increasing income, but there is considerable uncertainty about the magnitude of the impact that the different factors will have on future health care cost growth.The effect of the Patient Protection and Affordable Care Act (PPACA), enacted in March 2010, on the long-term fiscal outlook depends largely on whether elements in PPACA designed to control cost growth are sustained. There was notable improvement in the longer-term outlook after the enactment of PPACA under GAO's Fall 2010 Baseline Extended simulation, which assumes both the expansion of health care coverage and the full implementation and effectiveness of the cost-containment provisions over the entire 75-year simulation period. However, the federal budget remains on an unsustainable path. Further, questions about the implementation and sustainability of these provisions have been raised by the Centers for Medicare & Medicaid Services' Office of the Actuary and others, due in part to challenges in sustaining increased health care productivity. The Fall 2010 Alternative simulation assumed cost containment mechanisms specified in PPACA were phased out over time while the additional costs associated with expanding federal health care coverage remained. Under these assumptions, the long-term outlook worsened slightly compared to the pre-PPACA January 2010 simulation.
Federal health care spending is expected to continue growing faster than the economy. In the near term, this is driven by increasing enrollment in federal health care programs due to the aging of the population and expanded eligibility. Over the longer term, excess cost growth (the extent to which growth of health care spending per capita exceeds growth of income per capita) is a key driver. Slowing the rate of health care cost growth would help put the budget on a more sustainable path. There is general agreement that technological advancement has been the key factor in health care cost growth in the past, along with the effects of expanding health insurance coverage and increasing income, but there is considerable uncertainty about the magnitude of the impact that the different factors will have on future health care cost growth.