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Budget Control Act: Potential Impact of
Automatic Spending Reduction Procedures on
Health Reform
C. Stephen Redhead
Specialist in Health Policy
October 17, 2011
Congressional Research Service
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Budget Control Act: Potential Impact of Spending Reductions on Health Reform
Summary
The Budget Control Act of 2011 (BCA; P.L. 112-25) established new budget enforcement
mechanisms for reducing the federal deficit by at least $2.1 trillion over the 10-year period
FY2012-FY2021. The BCA places statutory limits, or caps, on discretionary spending for each of
those 10 fiscal years, which will save an estimated $0.9 trillion during that period. In addition, it
creates a Joint Select Committee on Deficit Reduction (Joint Committee), which is instructed to
develop legislation to reduce the federal deficit by at least another $1.5 trillion through FY2021.
If Congress and the President are unable to enact a Joint Committee bill by January 15, 2012, that
reduces the deficit by at least $1.2 trillion over the period FY2012-FY2021, then automatic
annual spending reductions would be triggered beginning in FY2013. They would be achieved by
lowering the caps on discretionary spending and by an automatic across-the-board cancellation of
budgetary resources (i.e., spending cuts) for nonexempt direct spending programs—a process
known as sequestration.
The potential impact of spending reductions triggered by the BCA on health reform spending
under the Patient Protection and Affordable Care Act (PPACA; P.L. 111-148, as amended) would
appear to be somewhat limited. PPACA increases access to affordable health insurance by
expanding the Medicaid program and by restructuring the private health insurance market. It sets
minimum standards for private insurance coverage, creates a mandate for most U.S. residents to
obtain coverage, and provides for the establishment by 2014 of state-based insurance exchanges
for the purchase of health insurance through which certain individuals and families will be able to
receive federal subsidies to reduce the cost of purchasing that coverage. The law includes direct
spending to subsidize the purchase of health insurance coverage through the exchanges, as well as
increased outlays for the Medicaid expansion. Under the rules governing sequestration, Medicaid
spending would be exempt from any reduction, and cuts to Medicare would be capped at 2%.
PPACA also includes numerous mandatory appropriations that provide billions of dollars to
support temporary programs to increase coverage and funding for targeted groups, provide funds
to states to plan and establish exchanges, and support many other research and demonstration
programs and activities. These appropriations would, in general, be subject to direct spending
reductions under a sequestration order. However, for any given fiscal year in which sequestration
was ordered, only new budget authority for that year (including advance appropriations that first
become available for obligation in that year) would be reduced. Unobligated balances carried
over from previous fiscal years would be exempt from sequestration.
PPACA is likely to affect discretionary spending subject to the annual appropriations process. The
law reauthorizes appropriations for numerous existing discretionary grant programs and activities
authorized under the Public Health Service Act, permanently reauthorizes funding for the Indian
Health Service (IHS), and creates a number of new grant programs and provides for each an
authorization of appropriations. In addition, the Congressional Budget Office projects that both
the Department of Health and Human Services and the Internal Revenue Service will incur
substantial costs to implement the policies and programs established by PPACA. Most of these
costs will have to be funded through the appropriations process. Most of the PPACA-related
discretionary spending would be subject to automatic spending reductions triggered by the BCA.
Under the sequestration rules, however, any reduction in funding for community health centers
and the IHS would be capped at 2%.
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Budget Control Act: Potential Impact of Spending Reductions on Health Reform
Contents
Introduction...................................................................................................................................... 1
Health Reform Spending ........................................................................................................... 2
Report Roadmap........................................................................................................................ 3
Patient Protection and Affordable Care Act..................................................................................... 3
Coverage Expansions and Market Reforms Prior to 2014 ........................................................ 3
Coverage Expansions and Market Reforms Beginning in 2014................................................ 4
Estimated Impact and Costs of Coverage Expansions .............................................................. 5
Revenues.................................................................................................................................... 6
Savings from Payment and Delivery System Reforms.............................................................. 6
Impact of Automatic Spending Reductions on Health Reform........................................................ 7
Insurance Coverage Expansion ................................................................................................. 8
Mandatory Appropriations......................................................................................................... 9
Discretionary Spending ........................................................................................................... 10
Contacts
Author Contact Information........................................................................................................... 12
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Budget Control Act: Potential Impact of Spending Reductions on Health Reform
Introduction
The Budget Control Act of 2011 (BCA), which was enacted on August 2, 2011,1 is the product of
negotiations between the President and Congress to raise the nation’s debt ceiling and avoid the
federal government reaching its borrowing limit. The BCA authorizes an increase in the debt limit
of at least $2.1 trillion (and up to $2.4 trillion) in three installments. Congress could block the
second and third installments by passing a joint resolution disapproving the debt limit increase
and overriding an expected presidential veto, an outcome that is considered extremely unlikely.
In addition, the BCA establishes a process for reducing the federal deficit by at least $2.1 trillion
over the 10-year period FY2012-FY2021. First, the law places statutory limits, or caps, on
discretionary spending for each of the next 10 fiscal years.2 For FY2012 and FY2013, separate
caps for security and nonsecurity spending will be in effect.3 For the remaining eight fiscal years
(i.e., FY2014-FY2021), a single cap will apply to total discretionary spending. The Congressional
Budget Office (CBO) estimates that these discretionary spending limits, which grow by
approximately 2% each year, will reduce federal spending by $917 billion between FY2012 and
FY2021, compared to the projected level of spending if annual appropriations had grown at the
rate of inflation.4
Second, the BCA creates a Joint Select Committee on Deficit Reduction (Joint Committee),
composed of an equal number of Democrats and Republicans from the House and Senate. The
Joint Committee is instructed to develop legislation to reduce the federal deficit by at least
another $1.5 trillion through FY2021.5 It has until November 23, 2011, to approve a bill and have
it considered by the House and Senate under special procedures that prevent amendments and
limit debate in both chambers. If Congress and the President, for whatever reason, fail to enact a
Joint Committee bill reducing the deficit by at least $1.2 trillion over the period FY2012-FY2021,
then automatic annual spending reductions would be triggered beginning in FY2013.
The spending reductions would be equally divided between defense spending and all other
spending (i.e., nondefense spending).6 The amount of reduction required in each category would
then be divided proportionately between discretionary spending and mandatory spending, also
referred to as direct spending.7 The reductions would be achieved (1) by lowering the annual caps
1 P.L. 112-25, 125 Stat. 240. For a more detailed examination of all the provisions in the BCA, see CRS Report
R41965, The Budget Control Act of 2011, by Bill Heniff Jr., Elizabeth Rybicki, and Shannon M. Mahan.
2 Discretionary spending refers to outlays from budget authority (i.e., the authority to incur financial obligations that
result in government expenditures) that is provided in and controlled by the annual appropriations acts.
3 Security spending comprises discretionary appropriations for the Department of Defense, the Department of
Homeland Security, the Department of Veterans Affairs, and other related activities. Nonsecurity spending comprises
all discretionary appropriations not included in the security category.
4 U.S. Congressional Budget Office, Analysis of Budget Control Act, August 1, 2011. Available at http://www.cbo.gov/
ftpdocs/123xx/doc12357/BudgetControlActAug1.pdf.
5 The BCA places no specific policy restrictions or requirements on the Joint Committee. The committee could
recommend changes in federal revenues, spending, or both.
6 As discussed later in this report, the annual discretionary spending caps for FY2012-FY2021 would be revised if
automatic spending reductions were triggered. The overall discretionary spending limit for each fiscal year would
remain unchanged, but that amount would be divided between defense discretionary spending and all other (i.e.,
nondefense) discretionary spending.
7 Mandatory, or direct, spending generally refers to budget authority that is provided in laws other than the annual
appropriations acts. Mandatory spending includes entitlement authority (e.g., Medicare, Social Security).
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Budget Control Act: Potential Impact of Spending Reductions on Health Reform
on discretionary spending for FY2014-FY2021, and (2) by an automatic across-the-board
cancellation of budgetary resources (i.e., spending cuts)—a process known as sequestration—for
discretionary spending in FY2013 and for nonexempt direct spending programs over the FY2013-
FY2021 period.
Health Reform Spending
There is considerable interest in how spending reductions triggered by the BCA would affect
implementation of the Patient Protection and Affordable Care Act (PPACA), the health reform
law enacted in March 2010.8 Among its many provisions, PPACA restructures the private health
insurance market, sets minimum standards for health coverage, creates a mandate for most U.S.
residents to obtain health insurance coverage, and provides for the establishment by 2014 of state-
based insurance exchanges for the purchase of private health insurance through which certain
individuals and families will be able to receive federal subsidies to reduce the cost of purchasing
that coverage. The new law also expands eligibility for Medicaid; amends the Medicare program
in ways that are intended to reduce the growth in Medicare spending that had been projected
under preexisting law; imposes an excise tax on insurance plans found to have high premiums;
and makes numerous other changes to the tax code, Medicare, Medicaid, the Children’s Health
Insurance Program (CHIP), and many other federal programs.9
PPACA is projected to have a significant impact on federal direct spending and revenues. The law
includes direct spending to subsidize the purchase of health insurance coverage through the
exchanges, as well as increased outlays for the expansion of the Medicaid program. PPACA also
includes numerous mandatory appropriations to fund temporary programs to increase access and
funding for targeted groups, provide funding to states to plan and establish exchanges, and
support many other research and demonstration programs and activities. The costs of expanding
public and private health insurance coverage and other spending are offset by revenues from new
taxes and fees, and by savings from payment and health care delivery system reforms designed to
slow the growth in spending on Medicare and other federal health care programs.
Implementing PPACA also is likely to affect discretionary spending through the annual
appropriations process. The law establishes multiple new grant programs for which it provides
authorizations of appropriations, and reauthorizes funding for many existing grant programs.
8 PPACA was signed into law on March 23, 2010 (P.L. 111-148, 124 Stat. 119). A week later, on March 30, 2011, the
President signed the Health Care and Education Reconciliation Act (HCERA; P.L. 111-152, 124 Stat. 1029), which
amended multiple health care and revenue provisions in PPACA. Several other bills that were subsequently enacted
during the 111th Congress made more targeted changes to specific PPACA provisions. All references to PPACA in this
report refer to the law as amended.
9 More information on the PPACA provisions may be found in the following CRS products: CRS Report R41664,
PPACA: A Brief Overview of the Law, Implementation, and Legal Challenges, by Hinda Chaikind et al.; CRS Report
R41210, Medicaid and the State Children’s Health Insurance Program (CHIP) Provisions in PPACA: Summary and
Timeline, by Evelyne P. Baumrucker et al.; CRS Report R41196, Medicare Provisions in the Patient Protection and
Affordable Care Act (PPACA): Summary and Timeline, coordinated by Patricia A. Davis; and CRS Report R41278,
Public Health, Workforce, Quality, and Related Provisions in PPACA: Summary and Timeline, coordinated by C.
Stephen Redhead and Erin D. Williams.
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Budget Control Act: Potential Impact of Spending Reductions on Health Reform
Report Roadmap
This report examines how automatic spending reductions triggered by the BCA might affect
health reform implementation under PPACA. If such a process were triggered, it must be
emphasized that the details of its execution would depend in large measure on the statutory
interpretations and actions of the Office of Management and Budget (OMB). Each year, OMB
would be responsible for determining the proportional allocation of required cuts to discretionary
and nonexempt direct spending in both the defense and nondefense categories. It would also have
exclusive authority in applying the exemptions and special rules related to sequestration.
The report is divided into two sections. The first section provides an overview of PPACA and
describes the budgetary effects of its insurance coverage and other key spending provisions,
based on CBO’s most recent 10-year budget estimates. The second section discusses which of
those provisions would likely be subject to, or exempt from, BCA spending reductions. This
report will be updated to reflect important legislative and other developments.
Patient Protection and Affordable Care Act
The primary goal of PPACA is to increase access to affordable health insurance for the millions of
Americans without coverage and make health insurance more affordable for those already
covered. In addition, PPACA makes numerous changes in the way health care is financed,
organized, and delivered. These provisions are intended to slow the growth in health care costs
and improve the quality of care by aligning payment incentives to increase efficiency and achieve
savings; organizing care delivery systems to promote accountable, patient-centered, and
coordinated care; and establishing benchmarks for better health outcomes.
While most of the major provisions of the law do not take effect until 2014, some provisions are
already in place, and others are to be phased in over the next few years.
Coverage Expansions and Market Reforms Prior to 2014
PPACA created several temporary programs to increase access and funding for targeted groups.
They include (1) temporary high-risk pools for uninsured individuals with preexisting conditions;
(2) a reinsurance program to reimburse employers for a portion of the health insurance claims’
costs for their 55- to 64-year-old retirees; and (3) small business tax credits for firms with fewer
than 25 full-time equivalents (FTEs) and average wages below $50,000 that choose to offer
health insurance.
In addition, several of PPACA’s private insurance market reforms have taken effect. Health plans
may not impose lifetime limits on the dollar value of essential benefits, rescind coverage (except
in cases of fraud), or deny coverage to children up to age 19 based on a preexisting condition.
Also, young adults up to age 26 generally must be allowed to remain on their parents’ plans.
Finally, plans must cover recommended preventive services and immunizations without any cost-
sharing.
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Coverage Expansions and Market Reforms Beginning in 2014
The major expansion and reform provisions in PPACA take effect in 2014. State Medicaid
programs will be required to expand coverage to all eligible non-pregnant, nonelderly legal
residents with incomes up to 133% of the federal poverty level (FPL). The federal government
will initially cover all the costs for this group, with the federal matching percentage phased down
to 90% of the costs by 2020. The law requires states to maintain the current CHIP structure
through FY2019, and extends CHIP appropriations through FY2015.10
Also beginning in 2014, states are expected to establish health insurance exchanges through
which eligible individuals and small employers will be able to purchase coverage from private
health insurance plans offering standardized benefit and cost-sharing packages. In 2017, states
may allow larger employers to purchase health insurance through the exchanges, but are not
required to do so. The Secretary of Health and Human Services (HHS) will establish exchanges in
states that do not create their own approved exchange. Refundable tax credits will be available to
individuals and families with incomes between 133% and 400% of the FPL to help offset the cost
of purchasing insurance coverage through the exchanges. In addition, certain individuals and
families receiving the premium credit will be eligible for a subsidy to lower their cost-sharing
(i.e., out-of-pocket costs such as deductibles and co-pays).
Federal health insurance requirements are further expanded in 2014, with no annual limits on the
dollar value of essential benefits and no exclusions for preexisting conditions allowed regardless
of age. Plans offered within the exchanges and certain other plans must meet essential benefit
standards, requiring them to cover emergency services, hospital care, physician services,
preventive care, prescription drugs, and mental health and substance use disorder treatment,
among other specified services. Premiums may vary by limited amounts, but only based on age,
family size, geographic area, and tobacco use. Finally, plans must sell and renew policies to all
individuals and may not discriminate based on health status.
Most U.S. citizens and legal residents will be required to have insurance. Those who remain
uninsured may have to pay a penalty. As plans will no longer be able to restrict coverage of
individuals with health problems, PPACA’s individual insurance mandate is intended to ensure
that healthy individuals participate in the insurance market rather than waiting until they need
health care services. Increasing the number of healthy persons in the risk pool helps spread the
risk.
PPACA requires employers with more than 200 full-time employees that offer health insurance
benefits to automatically enroll new employees in a coverage plan, though employees must be
given adequate notice and the opportunity to opt out. Employers with 50 or more full-time
employees that have at least one employee who is enrolled in an exchange plan and receiving a
premium tax credit may be subject to penalties, whether or not they provide health insurance
coverage to their employees.11
10 For more details on PPACA’s changes to the Medicaid and CHIP programs, see CRS Report R41210, Medicaid and
the State Children’s Health Insurance Program (CHIP) Provisions in PPACA: Summary and Timeline, by Evelyne P.
Baumrucker et al.
11 For more details on the employer penalties, see CRS Report R41159, Summary of Potential Employer Penalties
Under the Patient Protection and Affordable Care Act (PPACA), by David Newman.
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Estimated Impact and Costs of Coverage Expansions
The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) estimate
that PPACA will increase the number of nonelderly Americans with health insurance by about 34
million in 2021. The share of legal nonelderly U.S. residents with insurance coverage in 2021 will
be about 95%. Expansion of the Medicaid and CHIP programs is expected to attract 17 million
additional enrollees that year, accounting for roughly half of the increase in coverage. The other
half is due to an increase in private health insurance coverage. An estimated 24 million people
will purchase their own coverage through insurance exchanges in 2021. However, about 7 million
fewer people will purchase individual coverage directly from insurers or obtain coverage through
their employers, resulting in a net increase in the number of people with private insurance
coverage of about 17 million.12
CBO and JCT’s February 2011 baseline projections of the federal budgetary effects of PPACA
estimated that insurance coverage expansion will result in gross costs of $1,390 billion over the
10-year period FY2012-FY2021. Gross costs include the exchange subsidies and related
spending, increased spending on Medicaid and CHIP, and tax credits for certain small employers.
CBO and JCT further estimated that those costs will be partially offset by an estimated $348
billion from penalties paid by uninsured individuals and employers, an excise tax on high-
premium insurance plans, and net savings from other effects that coverage expansion is expected
to have on tax revenues and outlays. Thus, CBO and JCT projected in the February 2011 baseline
that PPACA’s insurance coverage provisions will result in net costs of $1,042 billion over the
FY2012-FY2021 period.13
The net costs of coverage expansion under PPACA are more than covered by (1) new revenue
sources from taxes and fees (other than those related to insurance coverage, mentioned above),
and (2) direct spending savings from payment and delivery system reform provisions that are
designed to slow the rate of growth of federal health care spending, primarily for Medicare, and
improve outcomes and the quality of care. In the February 2011 baseline, CBO and JCT projected
that the new revenues and direct spending savings—described briefly below—will total $1,252
billion over the 10-year period FY2012-FY2021. Based on those projections, CBO and JCT
estimated that PPACA implementation will reduce federal deficits by $210 billion over the
FY2012-FY2021 period.14
Note that CBO and JCT have provided revised March 2011 baseline projections of the costs of
insurance coverage expansion under PPACA, but have not yet revised the February 2011
estimates of the law’s offsetting revenues and direct spending savings. The March 2011 baseline
projects gross costs of $1,445 billion and net costs of $1,131 billion for insurance coverage
expansion over the 10-year period FY2012-FY2021.15 The discussion of the potential impact of
automatic spending reductions on insurance coverage expansion in the final section of this report
uses the March 2011 cost estimates.
12 U.S. Congress, House Committee on Energy and Commerce, Subcommittee on Health, “CBO’s Analysis of the
Major Health Care Legislation Enacted in March 2010,” Statement of Douglas W. Elmendorf, Director, 112th Cong., 1st
sess., March 30, 2011. Available at http://www.cbo.gov/ftpdocs/121xx/doc12119/03-30-HealthCareLegislation.pdf.
See Table 3.
13 Ibid., see Table 1.
14 Ibid., see Table 1.
15 Ibid., see Table 1.
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Revenues
The increase in revenues, totaling an estimated $520 billion over the period FY2012-FY2021, is
achieved largely by raising taxes on high-income households and by imposing fees on insurers
and on manufacturers and importers of pharmaceuticals and medical devices.16
Savings from Payment and Delivery System Reforms
PPACA includes numerous Medicare payment provisions intended to reduce the rate of growth in
spending. They include reductions in Medicare Advantage (MA) plan payments and a lowering of
the annual payment update for hospitals and certain other providers.17 PPACA establishes an
Independent Payment Advisory Board (IPAB) to make recommendations for achieving specific
Medicare spending reductions if costs exceed a target growth rate. IPAB’s recommendations will
take effect unless Congress overrides them, in which case Congress would be responsible for
achieving the same level of savings.18 Also, PPACA provides tools to help reduce fraud, waste,
and abuse in both Medicare and Medicaid.
Other provisions establish pilot, demonstration, and grant programs to test integrated models of
care, including accountable care organizations (ACOs), medical homes that provide coordinated
care for high-need individuals, and bundling payments for acute-care episodes (including
hospitalization and follow-up care). PPACA creates the Center for Medicare and Medicaid
Innovation (CMMI), to pilot payment and service delivery models, primarily for Medicare and
Medicaid beneficiaries. The law also establishes new pay-for-reporting and pay-for-performance
programs within Medicare that will pay providers based on the reporting of, or performance on,
selected quality measures.
Additionally, PPACA creates incentives for promoting primary care and prevention; for example,
by increasing primary care payment rates under Medicare and Medicaid, covering some
preventive services without cost-sharing, and funding community-based prevention and employer
wellness programs, among other things. The law increases funding for community health centers
and the National Health Service Corps to expand access to primary care services in rural and
medically underserved areas and reduce health disparities. Finally, PPACA requires the HHS
Secretary to develop a national strategy for health care quality to improve care delivery, patient
outcomes, and population health.
Overall, CBO estimates that the health care payment and delivery system reform provisions in
PPACA will result in a net reduction in direct health care spending of $732 billion over the period
FY2012-FY2021.19
16 Ibid., see Table 1. For more information about the revenue provisions in PPACA, see CRS Report R41128, Health-
Related Revenue Provisions in the Patient Protection and Affordable Care Act (PPACA), by Janemarie Mulvey.
17 For more information about the Medicare provisions in PPACA, see CRS Report R41196, Medicare Provisions in
the Patient Protection and Affordable Care Act (PPACA): Summary and Timeline, coordinated by Patricia A. Davis.
18 For more information about IPAB, see CRS Report R41511, The Independent Payment Advisory Board, by David
Newman and Christopher M. Davis.
19 U.S. Congress, House Committee on Energy and Commerce, Subcommittee on Health, “CBO’s Analysis of the
Major Health Care Legislation Enacted in March 2010,” Statement of Douglas W. Elmendorf, Director, 112th Cong., 1st
sess., March 30, 2011. Available at http://www.cbo.gov/ftpdocs/121xx/doc12119/03-30-HealthCareLegislation.pdf.
See Table 1.
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Impact of Automatic Spending Reductions on
Health Reform
As noted in the introduction to this report, the Joint Committee is charged with introducing
legislation that would reduce the federal budget deficit by a total of at least $1.5 trillion over the
period FY2012-FY2021. However, if Joint Committee legislation estimated to produce at least
$1.2 trillion in deficit reduction is not enacted by January 15, 2012, then automatic procedures for
cutting both discretionary and mandatory (direct) spending will take effect. Failure to enact any
such legislation would trigger automatic spending reductions totaling $1.2 trillion (including an
allowance for reduced interest payments on the debt). Enactment of Joint Committee legislation
estimated to produce less than $1.2 trillion in deficit reduction would trigger automatic cuts to
make up the difference.
The automatic spending reductions would take the form of equal cuts (in dollar terms) in defense
and nondefense spending for each fiscal year over the period FY2013-FY2021. The annual
amount of spending cuts required in each of these two categories would be divided
proportionately between discretionary and nonexempt direct spending. Direct spending
reductions—both defense and nondefense—would be executed through sequestration (i.e., an
across-the-board cancellation of budgetary resources). Importantly, the BCA exempts many direct
spending programs from sequestration and places a 2% limit on cuts to most Medicare spending.
Discretionary spending reductions in FY2013 also would be achieved through a sequestration of
appropriations. However, for each of the remaining fiscal years (i.e., FY2014-FY2021),
discretionary spending reductions would be achieved through a downward adjustment of the
statutory spending limits.20
The sequestration process was first established in 1985 by the Balanced Budget and Emergency
Deficit Control Act (BBEDCA), commonly known as the Gramm-Rudman-Hollings Act.21
Initially, sequestration was tied to annual maximum deficit targets. If the budget deficit exceeded
those target levels, then automatic across-the-board spending cuts would be triggered. The
BBEDCA has been amended several times, notably by the Budget Enforcement Act of 1990,22
which tied sequestration to new statutory spending limits, and most recently by the BCA. As
already noted, the sequestration process is subject to exemptions and special rules, which are
specified in Sections 255 and 256, respectively, of the BBEDCA.23 Several of those provisions
relate to health spending under PPACA and are discussed below.
20 As already noted (see footnote 6), the annual discretionary spending caps for FY2012-FY2021 would be revised if
automatic spending reductions were triggered. The overall discretionary spending limit for each fiscal year would
remain unchanged, but that amount would be divided between defense discretionary spending and all other (i.e.,
nondefense) discretionary spending. Discretionary spending reductions, whether by sequestration (FY2013) or through
a downward adjustment of the revised spending caps (FY2014-FY2021), would be applied to both spending categories.
21 P.L. 99-177, Title II, 99 Stat. 1038.
22 P.L. 101-508, Title XIII, 104 Stat. 1388-573.
23 For an overview of the BBEDCA exemptions and special rules, see CRS Report R42050, Budget “Sequestration”
and Selected Program Exemptions and Special Rules, coordinated by Karen Spar.
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Insurance Coverage Expansion
It appears that most of PPACA’s projected spending on expanding insurance coverage would not
be subject to sequestration in the event that spending reductions are triggered under the BCA.
First, the Medicaid and CHIP programs are both exempt from a sequestration order.24 According
to CBO’s March 2011 estimate, Medicaid and CHIP outlays account for $627 billion, or 43%, of
the gross costs of $1,445 billion for coverage expansion over the FY2012-FY2021 period.25
Second, the refundable tax credits available to individuals and families with incomes between
133% and 400% of the FPL for purchasing insurance coverage through the exchanges would also
appear to be exempt from a sequestration order.26 These premium tax credits have the effect of
limiting the cost of purchasing coverage to a specified percentage of income. According to CBO’s
March 2011 estimate, the premium tax credits account for approximately 84% of PPACA’s
exchange subsidies and related spending, which total an estimated $777 billion over the FY2012-
FY2021 period, or about 54% of the $1,445 billion in gross costs for coverage expansion.27
In addition to the premium tax credits for purchasing coverage through an exchange, certain
individuals and families receiving the credits are also eligible for coverage with lower cost-
sharing (i.e., out-of-pocket costs such as deductibles and co-pays) than otherwise required under
the law. This is achieved through a cost-sharing subsidy, which is paid directly to the insurer to
cover the extra costs associated with lower patient cost-sharing. The cost-sharing subsidies would
not appear to be exempt from a sequestration order.28 According to CBO, they represent about
15% of PPACA’s exchange subsidies and related spending.29
In general, federal administrative expenses are subject to sequestration, regardless of whether
they are incurred in connection with a program or activity that is otherwise exempt or subject to a
special rule.30 Thus, while the PPACA refundable tax credits may be exempt from sequestration,
the federal administrative expenses associated with the program would not be exempt. However,
federal payments to state and local governments that match or reimburse these governments for
their administrative costs are not considered federal administrative expenses and are subject to
24 Low-income programs, including Medicaid and CHIP, that are exempt from sequestration are listed in BBEDCA
Section 255(h). 2 U.S.C. §905(h).
25 U.S. Congress, House Committee on Energy and Commerce, Subcommittee on Health, “CBO’s Analysis of the
Major Health Care Legislation Enacted in March 2010,” Statement of Douglas W. Elmendorf, Director, 112th Cong., 1st
sess., March 30, 2011. Available at http://www.cbo.gov/ftpdocs/121xx/doc12119/03-30-HealthCareLegislation.pdf.
See Table 2.
26 While the PPACA premium tax credits are not specifically exempted from sequestration, BBEDCA Section 255(d)
provides a general exemption for refundable income tax credits. It reads as follows: “Payments to individuals made
pursuant to provisions of the Internal Revenue Code of 1986 establishing refundable tax credits shall be exempt from
reduction under any order issued under this part.” 2 U.S.C. §905(d).
27 U.S. Congress, House Committee on Energy and Commerce, Subcommittee on Health, “CBO’s Analysis of the
Major Health Care Legislation Enacted in March 2010,” Statement of Douglas W. Elmendorf, Director, 112th Cong., 1st
sess., March 30, 2011. Available at http://www.cbo.gov/ftpdocs/121xx/doc12119/03-30-HealthCareLegislation.pdf.
See Table 2.
28 The impact of such an order is unclear. PPACA entitles certain low-income exchange enrollees to coverage with
reduced cost-sharing and requires the participating insurers to provide that coverage. Sequestration would not change
that requirement. In the event of a sequestration order, insurers presumably would still have to provide required
coverage to qualifying enrollees but they would not receive the full subsidy to cover their increased costs.
29 http://www.cbo.gov/budget/factsheets/2011b/HealthInsuranceExchanges.pdf.
30 BBEDCA Section 256(h)(1), 2 U.S.C. §906(h)(1).
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sequestration, but only to the extent that the relevant federal program is subject to sequestration.31
For example, federal payments to state Medicaid programs for administrative costs would be
exempt from sequestration because the Medicaid program as a whole is exempt.
Mandatory Appropriations
PPACA includes numerous mandatory appropriations that provide billions of dollars to support
new and existing grant programs and other activities. Many of the provisions provide annual
appropriations of specified amounts for one or more fiscal years. A few of them are multiple-year
appropriations, in which the amount appropriated is available for obligation for a definite period
of time in excess of one fiscal year (e.g., for the period FY2011-FY2014). Often the provision
includes additional language stating that the funds are to remain available “until expended” or
“without fiscal year limitation.”
Among the more significant appropriations, PPACA creates a $1 billion fund to help pay for the
law’s implementation, and provides billions of dollars for the following temporary programs for
targeted groups: (1) $5 billion for the Pre-Existing Condition Insurance Plan (PCIP), a temporary
insurance program to provide health insurance coverage for uninsured individuals with a
preexisting condition; (2) $5 billion for a temporary reinsurance program to reimburse employers
for a portion of the costs of providing health benefits to early retirees aged 55-64; and (3) $6
billion for the Consumer Operated and Oriented Plan (CO-OP) program, to establish temporary
health insurance cooperatives.32 PPACA includes money for states to plan and establish health
insurance exchanges. The law also provides $10 billion for the FY2011-FY2019 period (and $10
billion for each subsequent 10-year period) for the CMMI to test and implement innovative
payment and service delivery models, and funds an independent board (i.e., IPAB) to provide
Congress with proposals for reducing Medicare cost growth and improving quality of care for
Medicare beneficiaries.
In addition, PPACA appropriates $2.4 billion for maternal and child health programs and
establishes three multi-billion dollar funds. First, the Community Health Center Fund (CHCF)
will provide a total of $11 billion over five years (FY2011-FY2015) in supplemental funding for
community health center operations and the National Health Service Corps. (A separate
appropriation provides $1.5 billion for health center construction and renovation.) Second, the
Patient-Centered Outcomes Research Trust Fund (PCORTF) will support comparative
effectiveness research through FY2019 with a mix of appropriations and fund transfers. Finally,
the Prevention and Public Health Fund (PPHF), for which an annual appropriation is provided in
perpetuity, is intended to support prevention, wellness, and other public health-related programs
and activities authorized under the Public Health Service Act (PHSA).33
Some of the appropriations in PPACA are included in CBO and JCT’s estimate of the costs of
coverage expansion (e.g., funding for high-risk pools for individuals with preexisting conditions).
All the remaining amounts—including funding for community health centers, health workforce
31 BBEDCA Section 256(h)(3), 2 U.S.C. §906(h)(3).
32 Section 1857 of the Department of Defense and Full-Year Continuing Appropriations Act, 2011 (P.L. 112-10, 125
Stat. 38) cancelled $2.2 billion of the $6 billion appropriation for the CO-OP program.
33 For more details on all of PPACA’s mandatory appropriations, see CRS Report R41301, Appropriations and Fund
Transfers in the Patient Protection and Affordable Care Act (PPACA), by C. Stephen Redhead.
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programs, and public health activities—are captured in CBO’s overall estimate of the impact of
the law’s payment and delivery system reform provisions on direct spending.
The mandatory appropriations in PPACA would, in general, be subject to direct spending
reductions under a sequestration order. However, for any given fiscal year in which sequestration
was ordered, only new budget authority for that year (including advance appropriations that first
become available for obligation in that year) would be reduced. Unobligated balances (non-
defense only) carried over from previous fiscal years are exempt from a sequestration order.34
Thus, an FY2013 sequestration order to reduce direct spending would not apply to unobligated
PPACA funds that had been appropriated in a prior fiscal year (i.e., FY2010-FY2012) and were
still available for obligation.
The exemption for unobligated balances carried over from prior fiscal years is a potentially
important one that would apply to a number of PPACA appropriations. As already mentioned, the
appropriation provision often specifies that the funds are to remain available “until expended” or
“without fiscal year limitation.” One example is the PCIP program to provide health insurance
coverage for eligible individuals who have been uninsured for six months and have a preexisting
condition. The program terminates on January 1, 2014. PPACA appropriated $5 billion in
FY2010, to remain available without fiscal year limitation, to pay claims against the PCIP that are
in excess of the premiums collected from enrollees. Any unobligated PCIP funds in FY2013
would be exempt from sequestration.35
Discretionary Spending
PPACA implementation will affect not only direct spending and revenues but also discretionary
spending subject to the annual appropriations process. The law reauthorizes appropriations for
numerous existing discretionary grant programs and activities authorized under the PHSA, and
permanently reauthorizes appropriations for programs and services provided by the Indian Health
Service (IHS). While the authorizations of appropriations for most programs had expired prior to
their reauthorization in PPACA, most of them continued to receive an annual appropriation.
PPACA also creates a number of new grant programs and provides for each an authorization of
appropriations.36
Funding for all these discretionary programs depends on actions taken by congressional
appropriators, a process that may lead to greater or smaller amounts than the sums authorized by
PPACA. With Congress now operating under BCA’s discretionary spending limits, it may prove
difficult to secure funding for new programs and activities. Even maintaining current funding
levels for existing programs with an established appropriations history may prove a challenge
under growing pressure to reduce federal discretionary spending.
34 An exemption for non-defense unobligated balances is provided in BBEDCA Section 255(e). It reads as follows:
“Unobligated balances of budget authority carried over from prior fiscal years, except balances in the defense category,
shall be exempt from reduction under any order issued under this part.” 2 U.S.C. §905(e).
35 Table 2 in CRS Report R41301, Appropriations and Fund Transfers in the Patient Protection and Affordable Care
Act (PPACA), shows all the PPACA appropriations by fiscal year over the period FY2010-FY2019 and, for each
provision, indicates whether the funds are to remain available for an indefinite period of time (i.e., until expended, or
without fiscal year limitation), subject to any requirement that the program terminate on a specific date.
36 For more details on all of PPACA’s discretionary spending provisions, see CRS Report R41390, Discretionary
Funding in the Patient Protection and Affordable Care Act (PPACA), coordinated by C. Stephen Redhead.
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CBO estimates that PPACA’s discretionary spending provisions, if fully funded by future
appropriations acts, would result in appropriations of almost $100 billion over the period
FY2012-FY2021. However, most of that funding—about $85 billion—would be for programs
that were in existence prior to, and were reauthorized by, PPACA; namely, the National Health
Service Corps, the health centers program, and the IHS.37
In addition, CBO projects that both HHS and the Internal Revenue Service (IRS) will incur
substantial costs to implement the policies and programs established by PPACA. Most of these
costs will have to be funded through the appropriations process. CBO estimates that the costs to
the IRS of implementing the eligibility determination, documentation, and verification processes
for premium and cost-sharing subsidies will probably total between $5 billion and $10 billion
over 10 years. It further estimates that the costs to HHS for implementing the changes in
Medicare, Medicaid, and CHIP, as well as some of the reforms to the private insurance market,
will require similar amounts over 10 years.38
Most of the discretionary spending arising from authorizations of appropriations in PPACA would
be subject to automatic spending reductions triggered by the BCA. As noted earlier, discretionary
spending reductions in FY2013 would be achieved through a sequestration of appropriations,
whereas reductions in later years (i.e., FY2014-FY2021) would be achieved through a downward
adjustment of the revised statutory spending limits. Lowering the annual spending limits would
make it that much more of a challenge to maintain funding levels for existing programs. Under
the BBEDCA sequestration rules, however, any reduction in funding for community health
centers and the IHS would be capped at 2%.39
37 U.S. Congress, House Committee on Energy and Commerce, Subcommittee on Health, “CBO’s Analysis of the
Major Health Care Legislation Enacted in March 2010,” Statement of Douglas W. Elmendorf, Director, 112th Cong., 1st
sess., March 30, 2011. Available at http://www.cbo.gov/ftpdocs/121xx/doc12119/03-30-HealthCareLegislation.pdf.
See p. 16.
38 Ibid., see p. 15. Section 1105 of the Health Care and Education Reconciliation Act established a Health Insurance
Reform Implementation Fund (HIRIF) within HHS and appropriated $1 billion to the Fund to implement PPACA.
CBO’s estimates of the amount of discretionary funding necessary to implement PPACA are in addition to the funding
provided to the HIRIF.
39 BBEDCA Section 256(e), 2 U.S.C. §906(e). This subsection identifies the health centers program (i.e., PHSA
Section 330), which is administered by the Health Resources and Services Administration (HRSA), using the budget
account identification number that applies to HRSA and all its discretionary programs and activities. But PPACA, in
addition to reauthorizing discretionary funding for the health centers program, provides a mandatory appropriation of
$9.5 billion over five years (FY2011-FY2015) in supplemental funds for the program through the CHCF. While any
BCA-triggered reduction in discretionary spending for the health centers program would clearly be subject to the 2%
cap, it would appear that the mandatory funds would not be affected by the cap. However, OMB might decide to
subject both the discretionary and mandatory funds for health centers to the 2% cap, as both sources of funding are
being used for the same program, notwithstanding the fact that the mandatory funds represent direct spending and are
identified in the budget by a separate account number.
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Author Contact Information
C. Stephen Redhead
Specialist in Health Policy
credhead@crs.loc.gov, 7-2261
Congressional Research Service
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