No, ObamaCare Won't Reduce the Deficit

A new paper by one of Medicare's Trustees reveals the disastrous budgetary consequences of the health law.

The short version: Despite repeated claims to the contrary, ObamaCare won't reduce the deficit over the next decade.

The longer version: The health law's backers relied on—and are still hiding behind—government budgeting conventions in order to argue that the law will result in lower overall deficits relative to expectations about the current fiscal trajectory. No matter how you run the numbers, the law can be expected to increase both total federal health spending and deficits.

That's the conclusion reached by Charles Blahous, a Medicare Public Trustee, in a new paper for the Mercatus Center at George Mason University.

Blahous ran the law through three possible futures. The first is an "optimistic scenario" in which all of ObamaCare's hoped-for cost savings, including both those many suspect are "politically implausible" and even "some additional savings not scored by [the Congressional Budget Office]." The second, intermediate scenario assumes that Congress will weaken the effects of some of the law's cost-savings. A third and final scenario does not represent the true worst case, but looks at the budgetary effects will play out should Congress decide "to overturn certain savings provisions under the ACA in a manner relatively consistent with historical precedent"—in other words, if Congress behaves exactly as it has in the past.

In every single scenario—from the most optimistic to the most historically consistent—Blahous finds that health spending increases. So do federal deficits.

Why are these projections so different from the favorable Congressional Budget Office (CBO) scores touted by the administration? Because unlike the CBO, Blahous is not bound to a scoring convention that requires him to participate in the administration's double counting of the law's supposed Medicare savings.

The law includes about $500 billion in Medicare savings, mostly stemming from reduced payments to providers. The CBO score assumes that these savings will be plowed back into the law's expansion of health coverage—the combination of expanded Medicaid and middle-class health insurance subsidies that account for the vast majority of the law's spending.

But the same reductions also allow Medicare's officials, as well as various opportunistic legislators and senior members of the Obama administration, to claim that the law extends the life of Medicare's Hospital Insurance (HI) trust fund. As Blahous notes, two Democratic members of Congress, Reps. Henry Waxman and Frank Pallone, wrote a Dear Colleague letter in January, 2011 noting that the law "strengthens the Medicare trust fund, extending its solvency from 2017 through 2029." Health and Human Services Secretary Kathleen Sebelius has made the same claim, as did former Medicare head Donald Berwick.

But make no mistake. This is a form of double counting, as the same Congressional Budget Office that provided the favorable scores agreed. In December, 2009, CBO Director Doug Elmendorf responded to questions about the scoring convention:

CBO has been asked whether the reductions in projected [Medicare] Part A outlays and increases in projected HI revenues under the legislation can provide additional resources to pay future Medicare benefits while simultaneously providing resources to pay for new programs outside of Medicare. Our answer is basically no….To describe the full amount of HI trust fund savings as both improving the government's ability to pay future Medicare benefits and financing new spending outside of Medicare would essentially double-count a large share of those savings and thus overstate the improvement in the government's fiscal position. [bold added]

Richard Foster, Medicare's Chief Actuary, provided an even more detailed answer at a think tank panel last summer—the gist of which was that, because of trust fund accounting conventions, the law collects trust fund dollars once but allows them to be spent twice. Ultimately that means that the second, imaginary dollar will have to be paid for either by borrowing, cutting spending elsewhere, or raising taxes. 

So if Medicare's solvency is to be extended, the law's Medicare savings won't be usable for funding the coverage expansion. And since legislators and administration officials have spent the last two years touting how the law extends Medicare's solvency, there's no reason to think that federal legislators will choose to let Medicare go into insolvency earlier—especially given the extreme political sensitivities surrounding the program's fiscal health. That means that the money won't be available to pay for the insurance subsidies.

The administration, however, is still hiding behind the scoring convention. "Opponents of reform are using 'new math' while they attempt to refight the political battles of the past," a White House budget official told The Washington Post in response to questions about Blahous' paper. "The fact of the matter is, the Congressional Budget Office and independent experts concluded that the health-reform law will reduce the deficit." Another important fact would seem to be that the score was generated using assumptions that don't accurately reflect the reality of how the law will be implemented and funded.

And the reality, according to Blahous, is that even under the rosy assumption that the law's various health savings mechanisms actually pay off, the deficit still increases by about $340 billion. If the savings mechanisms don't work, the damage will be even worse.

This is not the fault of the budget scorekeepers. As Blahous says, "To point out that the oft-cited CBO analysis is based on a scoring convention rather than on a literal reading of law should not be construed as a criticism of the methodology of the CBO or of the Medicare trustees (of whom this author is one)."

It's the fault of the administration and its allies in Congress, who've shamelessly abused the scoring process in an effort to cover the health law's budgetary shortcomings with a fig leaf of fiscal responsibility. In congressional testimony last year, Sebelius was asked whether the Medicare savings money would be used to fund ObamaCare's healths subsidies or extend the life of Medicare. Her response? "Both." 

Indeed, as Blahous notes, federal scorekeepers have "taken pains to warn lawmakers that the provisions of the ACA intended to produce budgetary savings ultimately may be less than fully effective."

But ObamaCare's backers in Congress and the White House ignored those warnings, preferring to have it both ways—insisting over and over that the law will both reduce the deficit and keep Medicare's finances afloat. Ultimately, the accounting will catch up to them. 

Peter Suderman is a senior editor at Reason magazine.