Policy

Why You Shouldn't Trust Medicare Trust Fund Accounting

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Here's the new liberal line on ObamaCare's effects on the budget: You can't criticize it for using an accounting convention that allows for double counting because, well, it's an accounting convention and we've always done it that way.

A refresher: Yesterday, Charles Blahous, one of Medicare's Public Trustees, released a study reporting that, contrary to other estimates, ObamaCare was likely to increase the deficit. The reason? Double counting. The law reduces Medicare payments by roughly $500 billion over the next 10 years. That reduction allows Medicare officials and politicians to claim that the law improves the health of the Medicare Hospital Trust Fund. But the same dollars that are also said to extend the life of Medicare are also used to fund much of the law's expansion of health coverage. Trust fund accounting essentially allows for one dollar to be raised and then for that same dollar to be spent twice.

Defenders of the health law have responded in a number of ways. Some, like Paul Van de Water of the Center on Budget and Policy Priorities, a liberal policy shop, have simply denied that any double counting exists at all. "There's no double-counting involved in recognizing that Medicare savings improve the status of both the federal budget and the Medicare trust funds," he writes. The specific issue here, however, is that if the money gained from reduced provider payments is used to shore up the Medicare trust fund, it cannot also be used to pay for health insurance subsidies. One or the other, but not both.

Another popular line is that Blahous has not offered any new revelations in his paper; he has simply explained how traditional trust fund accounting conventions work. "Opponents of reform are using 'new math' while they attempt to refight the political battles of the past," a White House spokesperson told The Washington Post yesterday in response to the study.  Van de Water takes a similar stance, dismissing Blahous' argument because it "adds nothing new to the debate." The Urban Institute's Robert Reischauer, another Medicare Trustee, tells New York Magazine's Jonathan Chait, who blasted the study as "bogus," that there's nothing new in the paper—just a rehash of old complaints:

Under accepted CBO and OMB scoring practices, legislated reductions in Medicare HI spending both reduce the deficit and strengthen the HI trust fund.  That has been the case under both D and R Congresses and administrations.  Chuck's "revelation" is not a new charge.  Some argued this point when the ACA was enacted. It remains as misleading today as it did earlier.

This is an odd defense. Essentially Reischauer is saying: Well, this convention has been criticized before, but it's always been done this way, so it can't really be a problem.  

It is certainly true that complaints about the way the law double counts Medicare savings are not new, and that the accounting convention involved has been used for a long time. But does that mean there is no double counting involved? Not at all.

As I noted in my column yesterday, the Congressional Budget Office has been quite clear on the matter. Asked in 2009 whether it would be accurate to say that reductions in Medicare outlays could be used to both improve Medicare's fiscal position and pay for any outside programs, such as ObamaCare's insurance subsidies, the CBO responded that "our answer is basically no." According to the CBO, to do so would be double counting, and that double counting would make the government's fiscal state look better than it really is:

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.

In other words: Savings produced by reducing Medicare payments can improve Medicare's fiscal health. Or they can be spent on expanding insurance coverage. But not both.

Yet the administration and its allies have repeatedly said that the law's Medicare reductions do both. The reason that White House officials can get away with making that claim is a longstanding convention of trust fund accounting that allows the trust fund to register funds even though the same funds are then used to pay for other expenses.

Just because it is an old accounting practice, however, does not mean that there is nothing to be concerned about. Richard Foster, Medicare's Chief Actuary, explained this convention and its consequences at an American Enterprise Institute panel last summer:

To use a simplified example, let's say you as an individual have to pay an extra $100 in hospital insurance payroll taxes because of the Affordable Care Act. So an extra $100 in actual cash comes from you to the Treasury and it's credited to the Hospital Insurance Trust Fund. We get a bond of $100 for it. The cash itself is still sitting there and it will be spent like that [makes a motion that indicates "very quickly"].

Money does not sit around long in the Treasury. It may well be spent to help pay for other Affordable Care Act provisions or anything else that it needs to be spent on. So your $100 is spent.

But I have a promise for the Hospital Insurance trust fund that any time I need that money back I can get it. So let's say it was spent for other coverage expansions, and now three years later I need it back to help pay for hospital insurance costs. So I let Treasury know. They come up with $100 in cash plus the five dollars in interest they owe or whatever it might be and they give me that cash and I spend it.

So far we've had a need for $200—$100 for the coverage expansion and $100 for HI [the Hospital Insurance fund]. We spent $200. And I got my money back. But you only paid $100.When I got my money back, Treasury had to raise that money some other way.  They'd already spent your $100. And they had to raise it by further borrowing, or not spending some other $100, or raising a new tax for $100.

So on the one hand, all this is nothing new. This is traditional trust fund accounting. It's just the way it works through the lending and redeeming operation. On the other hand, if you're going to spend $200, you need $200.

The government takes in one dollar. It spends that dollar twice. Without further cuts or tax hikes, that means the budget deficit goes up. 

Understanding this, I have developed a plan to use trust fund accounting conventions for all my freelance work going forward. First I'll record an increase for each new dollar in a Google spreadsheet titled: Freelance Work Trust Fund Account. Then I'll spend all the money on comic books. In no time at all I'll have a lot of comic books, and a huge trust fund account.

For a lot more on both trust fund accounting the Blahous study, check out Avik Roy's comprehensive post at Forbes. Blahous responds directly to his critics here.