The Health Care Compact Generates Nearly $3 Trillion in Savings

The Self-Governance Institute recently analyzed the fiscal impact of the Health Care Compact (HCC), an interstate compact to return decision-making and funding for health care to the states, on the federal deficit.  The conclusion:  This single governance reform can significantly alleviate the federal government’s budget problems.  In fact, implementation of the HCC in all 50 states cuts the deficit by nearly $3 trillion by 2021.

The Budget Control Act of 2011 (BCA) creates a Congressional joint committee charged with identifying deficit reductions of $1.5 trillion between 2012 and 2021.  As part of its mandate, the so-called “super-committee” will consider spending cuts, entitlement reform, and tax reform.

All eyes are on the super-committee, which has only until November 23, 2011 to make its recommendations.  According to a September 11, 2011 Politico article, the super-committee has met just once and doesn’t seem to be pushing the envelope with fresh ideas. 

When the commission meets next, health care spending must be high on the agenda for reform.  Federal health care spending is already one of the largest contributing factors to spiraling budgets and deficits.  And spending is projected to actually accelerate because of the new health care law.

As Washington’s new super-committee prepares for protracted policy and budget wrangling with no real reform in sight, the HCC offers real reform, shifting who decides about health care to the states and reducing the deficit by nearly $3 trillion over the next ten years. 

How Funding Works under the HCC

Under the HCC, each state receives annual funding from the federal government for health care.  The funding is mandatory spending for the federal government and is not subject to annual appropriations.  Funding for each state is calculated from a baseline of 2010 health care spending, adjusted for changes in population and inflation.  The increase of spending is controlled in a more fiscally responsible manner. 

Assuming the HCC is implemented in all 50 states in 2012, following is an example that illustrates how total health care spending would be computed under the HCC (in billions). 

The baseline spending for health care was $810 billion in 2010.  The 2012 spending is the baseline adjusted using a growth factor defined in the HCC itself:

2010 Healthcare spending x GDP Inflation Factor x Population Growth Factor = New Spending

Under the HCC, total health care spending would be $852 billion in 2012.  Following is an examination of total health care spending in 2012 under the existing health care law (in billions).

Data from the Congressional Budget Office, July 2011

In 2012, the HCC saves $5 billion by converting federal health care spending from a “defined benefit” approach to a “defined contribution” one. Note that this does not limit health care spending directly; states are free to spend more if they choose. But it caps the amount of federal funding, and indexes it for inflation and population changes.  Now let’s examine the impact through 2021.

The table below employs the same method to project savings each year from 2012 through 2021 (in billions).

Data from the Congressional Budget Office, July 2011

So, if all 50 states were to pass the Health Care Compact and regain control of health care regulation and funding, the federal government would no longer be responsible for administering Medicare, Medicaid, S-CHIP, and other health programs.  Funding for these programs would be calculated under the HCC’s simple funding formula, rather than the complex funding mechanisms that the federal government uses, and each state would be responsible for administering its own programs.   Most important, if all 50 states were to adopt the Health Care Compact, the federal government would save nearly $3 trillion over 10 years.

The Health Care Compact has been introduced in 13 states since February and is already adopted four states and is gaining significant additional momentum moving into 2012.