ObamaCare and the Deficit

| by Reason Foundation

By Peter Suderman

House Republicans plan to vote tomorrow to repeal last year’s health care overhaul. You can read the text of the repeal legislation here.

One of the key defenses of the law is that it will reduce the deficit over the next decade and the decades to come. But the projections employed to make this argument just aren’t believable. Democrats gamed the Congressional Budget Office’s scoring process, producing a score that distorted the long-term numbers and was believable only under a set of fantastic and improbable assumptions.

By now, the contours of this argument are fairly well mapped out. But for a clear and detailed refresher, you’d do well to read this op-ed by former CBO director Douglas Holtz-Eakin, EPPC’s James Capretta, and AEI’s Joseph Antos in today’s Wall Street Journal:

It's all about budget gimmicks, deceptive accounting, and implausible assumptions used to create the false impression of fiscal discipline.

For starters, that $1 trillion price is a low-ball estimate, covering only six – not ten – years of subsidies that don't begin until 2014. The uninsured were clearly less of a priority than the deception of making the law look less expensive than it really is over its first decade. Over ten years of full implementation, it's more like $2.3 trillion.

Next up is the CLASS Act (for the Community Living Assistance Services and Supports Act) providing a new long-term care insurance entitlement. CLASS hitched a ride on the ACA for one reason only: premiums are collected in the first ten years, but no benefits are provided. Voila, it creates the perception of $70 billion in deficit reduction. In fact, CLASS is a bailout waiting to happen, as it will attract mainly sick enrollees. Only in Washington could the creation of a reckless entitlement program be used as "offset" to grease the way for another entitlement.

The deepest spending cuts in the ACA are in Medicare. Let us be very clear: Medicare needs real reform that generates genuine budget savings. Sadly, the ACA's cuts are illusory. Medicare's payments to health care providers would fall below those of Medicaid. The network of hospitals and physicians willing to care for Medicaid patients is notoriously constrained. About 15 percent of the nation's hospitals would have to stop seeing Medicare patients in just a few years to stem their losses. The idea that Medicare could pay less than Medicaid is such sheer folly that Congress will rapidly reverse course. What's worse, ACA's advocates are double-counting this fictional savings, claiming it can pay both for the ACA's entitlements and Medicare solvency too. The truth is, these cuts cannot be relied upon to pay for anything.

The fantasy of deficit reduction from the ACA is also built on a $410 billion tax increase over the coming decade, and a flood of revenue in the years after built on cynically replicating the flawed AMT-style revenue creep. New Medicare taxes initially apply only to individuals with incomes over $200,000 and couples with incomes above $250,000. But those income thresholds do not rise with inflation, so more and more families will pay them each year. Similarly, the new "Cadillac tax" on expensive insurance applies to premiums for family coverage above $27,500 in 2018, but that threshold will rise with general inflation, not medical costs. It's particularly noteworthy that this tax is instrumental to the claim of deficit reduction in the second decade, but it is so controversial that Barack Obama was never willing to collect it himself. Overall, CBO says the ACA's tax hikes will reach 1.2 percent of GDP in 2035, or a whopping $180 billion annually in today's terms.

So, even if CBO's analysis were flawless, the authors of the ACA guaranteed a misleading bottom line. Their legislative prescriptions were written to create deficit reduction only on paper— not in reality.

When the CBO issued its scores for the health care overhaul, there was always a line cautioning that the deficit reduction was contingent upon the law being executed exactly as planned. Some of the scores even included a note specifically mentioning certain instances in which Congress has had trouble following through on its cost-cutting plans in the past. There’s a reason those warnings were included in the scores. As Holtz-Eakin, Capretta, and Antos make quite plain, the plans that Congress made in this bill made aren’t plausible. And that means that its alleged deficit reduction isn’t either.

The PPACA was a coverage bill, not a cost-containment bill. Its designers, in their unguarded moments, have been clear about this. For example, here’s David Bowen, a former health staff director of the Senate Health, Education, Labor and Pensions Committee—one of the key committees involved in writing the law:

"In Mass., there was a very conscious decision to do coverage first, knowing that that would bring on a cost battle second...We certainly made the same decision. This is a coverage bill, not a cost reduction bill. There is stuff here that will begin to address the issue of cost, but this is not a cost reduction bill with a bit of coverage on it—it is really trying to get coverage first."

As Bowen says, the PPACA lifted the major components of its design from the Massachusetts plan passed by Mitt Romney. But as lawmakers behind that plan told The New York Times in 2009, that legislative succeeded in passing “only by deferring the big decisions on cost containment.” The hope was that bringing more people into the system would make it easier to bring down costs. More people would have a stake, so more people would care about making the system work. But that was always a risky gambit. And the more likely outcome was a system burdened by the significant new costs of a new health insurance entitlement— and still no way to control the cost to the public of providing coverage.

The federal government lifted quite a bit from the Massachusetts plan, including its focus on coverage rather than cost-containment. I’ve called it the buy now, pay later strategy in the past, and I still think that sums it up. We bought. And now, without repeal, we’ll have to pay.