CBO Report on Obamacare Costs, Savings and Impact on Economy

Who Really Pays for Obamacare?

hospital administrators ehlp pay for obamacare
Higher fees on hospital administration help pay for Obamacare. Photo: Steve Debenport/Getty Images

The Congressional Budget Office first analyzed the impact of the Patient Protection and Affordable Care Act of 2010, more commonly known as Obamacare in March 2010. The CBO report covered both laws that enacted the ACA. It examined the Patient Protection and Affordable Care Act (Public Law 111-148) and the Health Care and Education Reconciliation Act (Public Law 111-152) in March 2010.

Although it's still heavily contested, the CBO's analysis makes sense overall.

According to the CBO, most of the savings is because the Act makes sure 95% of citizens have health care insurance. That lowers health care costs by making preventive health care affordable for most of the 33 million Americans who have no health insurance. They don't have to wait until their illness becomes so critical that they wind up using the hospital emergency room as their primary care provider. That lowers national health care costs for everyone.

The CBO report said the Affordable Care Act reduces the budget deficit by $143 billion between 2010-2019. Many people were understandably skeptical that a $940 billion program that expands health care coverage also saves money. That's because the ACA legislation has taxes and fees that more than offset the cost. Here's a summary of the savings. (To see how these taxes affect you, go to Obamacare Taxes.)

Reduce Medicare Payments by $335 Billion

Every year, Medicare agrees on certain payment rates for covered services to health care providers.

These annual updates are reduced by 21%, saving $196 billion. Hospital groups agreed to give up their portion ($155 billion) because they expect to make more than that –- at least $170 billion -- by having to treat fewer uninsured patients.

Another $136 billion is saved by reducing Medicare Advantage overpayments.

This private health plan covers one in five seniors. Medicare Advantage costs 13% more than traditional Medicare. Savings started in 2011.

Additional Fees to Drug Companies Nets $107 Billion

Drug companies will be charged higher fees to help cover the "donut hole" in Medicare Prescription Drug Part D benefits. Medicare only covers the first $2,840 in prescription drug costs. Before the Affordable Care Act, the patient paid 100%, up to $4,550, when Medicare coverage kicked in again. The Affordable Care Act helped cover the costs of the donut hole: $250 per patient in 2010, 50% in 2011, and 100% in 2020.

The extra drug company fees will add $84.8 billion in revenue over the next ten years. Also, they will subsidize the cost of prescription drugs, saving Medicaid $38 billion.

Excise Tax on High Premium Insurance Plans Will Add $32 Billion

Insurance companies will pay a 40% excise tax on so-called "Cadillac" high-end health insurance plans worth over $27,500 for families ($10,200 for individuals). Dental and vision plans are exempt and will not be counted in the total cost of a family's plan. This tax starts in 2018.

Taxes on High-Income Families Will Add $210 Billion

Medicare taxes on income and capital gains were raised for five million high-income families in 2013.

That includes one million people who make more than $200,000 and four million couples filing jointly who make more than $250,000. They will pay 3.8% in Medicare taxes on dividends, capital gains, rent, and royalties. They will also pay 2.35% in Medicare income taxes, up from 1.45%. (Source: Ryan Donmoyer, "Obama Spreads the Wealth," Bloomberg, March 22, 2010.)

Employer Penalties Could Contribute $65 Billion

Employers with more than 50 employees must provide health insurance or pay a tax of $2,000 per worker each year if any worker receives federal subsidies to purchase health insurance. Individuals must buy coverage or face a $695 annual fine. That started in 2015.

Education Savings of $19 Billion

Federal money is no longer used to subsidize student lending from Sallie Mae. As a result, Sallie Mae announced it would lay off 2,500 of its 8,600 U.S. employees.

Instead, the Department of Education lends directly to students. Since then, the amount of loans owned by the Federal Government directly has quadrupled to $464.9 billion as of May 2012. Loan repayments will be capped at 10% of a graduate's salary, down from the current 15%, starting in 2014.

At the same time, there are enough savings from eliminating the middle man to boost the Pell Grant program by $36 billion. (Source: CBO, Cost Estimate of Final Health Care Legislation, March 20, 2010; Fox Business News, Sallie Mae Blames Layoffs on Obamacare, March 31, 2010)

March 2012 Update

In March 2012, the CBO issued an update that showed the ACA would cost $50 billion less initially thought. That's because the CBO was looking at 2012-2021, a ten-year period that was two years out from the initial analysis. The revenue from the ACA grows over time, outweighing any further costs. (Source: Ezra Klein's Wonkblog, CBO Health Reform to Cut Deficit by $50 Billion More, March 15, 2012; CBO, Updated Estimates, March 13, 2012)

Effect of Supreme Court Decision

On June 28, 2012, the Supreme Court upheld most of the ACA. However, it allowed states to reject Federal funds to expand Medicaid to include more low-income residents. As a result, the CBO predicts 3 million fewer people will have insurance. That saves $84 billion from 2012 to 2022, lowering the impact on the deficit by that amount. (Source: Businessweek, "Obama's Health Law Reduces Deficit," July 24, 2012. CBO, Estimates of ACA Costs Incorporating Supreme Court's Decision, July 2012) 

For more on who really pays for Obamacare, see my book The Ultimate Obamacare Handbook (2015 - 2016).