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Does This Cost Curve Look Bent to You?

e21 | July 20, 2010

During the year-long push by Democrats for a health care bill, the promise was repeatedly made that the law would improve the federal budget outlook and “bend the cost curve.” Obama promised to veto a bill that “adds one dime to our deficits.” Yet numerous outside analysts, commenting on every step ObamaCare took, concluded that deficit-neutrality was a ruse.

Stanford economist John Taylor used a chart based on new CBO numbers to lay the issue out starkly and show that government health spending is still the primary driver of federal spending, even after the so-called reform law was passed. This chart shows how the rapid growth of federal health spending will cause a fiscal catastrophe.

Percent of GDP

It was never realistic to believe that ObamaCare could bend the cost curve, because any cuts in existing health entitlement spending were matched with the creation of new premium subsidies.

“Thus, Obamacare does not address the explosive health care spending problem, which will come as no surprise to its critics, but is clearly contrary to the claims of those who supported it. Moreover, to the extent that Obamacare slowed growth in Medicare it more than offset this with new entitlements, making controlling health care spending even more difficult now. The data are clear: In order to control government spending, you have to start over on health care reform.”

And it’s not just outside economists. The official government scorekeepers are also crying foul. The latest blow came from recent testimony by Congressional Budget Director Doug Elmendorf. He maintained his previous judgment that the law, if implemented as written, would produce mild savings, but with the caveat that those savings would likely not materialize, and if they did it wouldn’t make a difference.

Elmendorf said CBO still expects the health system reform law to reduce the federal deficit by $143 billion by 2019 and by about 0.5% of the gross domestic product in the following decade. Predicting the law's effect beyond about 2030 is difficult because of the uncertainties involved, he said.

However, these savings are small considering the fiscal challenges facing the country, Elmendorf said. Federal deficits for this fiscal year are expected to reach 62% of the GDP, levels not seen since just after World War II. In CBO's judgment, Elmendorf said, the health care law "made a dent in the problem, but did not substantially diminish that challenge."

If Congress protects wealthier taxpayers, prevents Medicare pay cuts and backtracks on cuts in the health reform law, the deficit could reach highs of 109% of GDP by 2025 and 185% of GDP by 2035, Elmendorf said. Such deficits would create a fiscal crisis in which the cost of borrowing would spike, slowing the economy. [Emphasis added]

This tracks with a report by Richard Foster, the chief actuary at the Centers for Medicare and Medicaid Services, who studied the legislation in various forms and concluded that cost estimates were overly optimistic. In his analysis of the final version of the law, he concluded that “in aggregate, we estimate that for calendar years 2010 through 2019, [national health expenditures] would be increased by $311 billion.”

The long term budget picture is dire. The federal government spends too much on health care. A law was passed that was supposed to help, but instead had no positive effect on costs over the long term. Real reform is badly needed, and soon.

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