Health Care Reform Isn't Entitlement Reform

Despite administration promises, ObamaCare hasn't helped Medicare.

In February 2009, as the Obama administration was beginning to make its pitch for a major health care overhaul, then-White House budget director Peter Orszag made his closing pitch for the law at a summit in Washington: "To my fellow budget hawks in this room and in the rest of the country, let me be very clear: health care reform is entitlement reform," he said. "The path of fiscal responsibility must run directly through health care." A little more than a year later, the law that would become known as ObamaCare passed.

So how is Medicare, the nation's biggest health care entitlement, doing now? Not so well. Two years after the passage of the Patient Protection Protection and Affordable Care Act, the program's Trustees are reporting that the seniors' health program is on a glide path to insolvency—perhaps by as soon as 2016. The technocratic reforms that were supposed to remake the program aren't working nearly as well as hoped. And there are already signs that the Medicare spending reductions called for by the health care law will be delayed or undercut just as many critics warned.

Medicare's finances have been precarious for years. The program has skirted the boundaries of insolvency on multiple occasions, but never quite tipped over the cliff. Yet it has only survived on temporary patches and half measures. In the long term—and perhaps sooner—the program will eventually prove unsustainable.

This week saw the release of the latest report from the program's trustees, and the picture it paints is bleak. The program's trust fund is rapidly being depleted. By 2024, current projections indicate, the trust will be empty, and the program, relying solely on existing revenues, will be unable to pay all of its bills. In its first year of insolvency, the program will be able to finance just 87 percent of its obligations, a percentage that will decline further over time.

But even that calculation overstates the program's fiscal outlook. That's because it relies on the assumption that ObamaCare's Medicare payment reductions and other structural reforms will produce savings that shore up Medicare's trust fund. The problem, as Medicare Trustee Charles Blahous recently pointed out, is that these savings—roughly $500 billion over the next decade—are also expected to be used to finance the law's vast expansion of health insurance coverage. If that money is spent on insurance coverage, then Medicare's trust fund would hit insolvency in 2016.

As Richard Foster, Medicare's Chief Actuary, has explained, the conventions of trust fund accounting allow the federal government to collect one dollar in revenues but spend that same dollar twice. But even the government's top fiscal magicians haven't figured out how to make that work without consequences: Eventually that second dollar has to be accounted for, either with higher taxes, previously unplanned spending cuts in other areas, or additional borrowing.

All this assumes that the law's Medicare savings will actually pay off. Yet that is no sure thing either. Those projected savings are based in large part on targeted payment cuts to health industry players and providers. Those cuts, however, are already facing heavy opposition, and the White House has already backed down at least once.

On the same day that the Medicare Trustees report was released, the Government Accountability Office published a critical report on the administration's decision to override planned payment cuts to private insurers in the Medicare Advantage program—cuts that played a big part in generating ObamaCare's alleged Medicare savings. A week earlier, progressive champion and Massachusetts Senate hopeful Elizabeth backed scrapping ObamaCare's tax on medical device makers. In this sort of political environment, it is hard to see how all of ObamaCare's savings will stick.

Nor are the experimental delivery system reforms intended to weed out waste and excessive cost growth within Medicare working as hoped. ObamaCare sought to reform the system with a multitude of pilot programs designed to overhaul the nation's health care and payment structure. But according to the Congressional Budget Office, the results of many of Medicare's demonstration project are "disappointing" and "discouraging."

The same can be said for the rest of ObamaCare's effect on Medicare. The Obama administration gave us health care reform. But America's entitlement system is now more in need of real reform than ever before.

Peter Suderman ([e-mail]) is a senior editor at Reason magazine.