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Yes, the Health Law Worsens the Deficit

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Yes, the Health Law Worsens the Deficit

April 18, 2012

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Last week the Mercatus Center published my study showing that the health care law of 2010 (the ACA) will add at least $340 billion to federal deficits over the next ten years, and more than $1.15 trillion to net federal spending.

The study has received a great deal of attention. The resulting debate has highlighted the need for wider public understanding of federal budget procedures. In this article I will explain some of those budget rules while further substantiating that my basic conclusion is correct.

Point #1: For other parts of the federal budget, analyzing the literal change in law as my study did is the accepted scorekeeping norm.

There is apparently some confusion out there on this point. Paul Krugman, for example, suggested that I was both wrong and atypical in comparing the health care law to prior law:

(I)n general, you almost always want to assess legislation against “current policy”, not “current law”; there are lots of things that legally are supposed to happen, but that everyone knows won’t, because new legislation will be passed to maintain popular tax cuts, sustain popular programs, and so on.

Dr. Krugman is incorrect to assert that legislation is usually assessed against “current policy” rather than “current law.” The Congressional Budget Office (CBO) indeed constructs multiple baselines, and there is an ongoing argument over whether the “current law” or the “alternative” (current policy) baseline is the most meaningful. But as a technical matter, CBO typically scores Congressional proposals, as well as the President’s budget, against “current law” on the tax side. The literal “current law” approach underlies CBO’s conclusion that extension of the tax rates established in 2001/03 would add to the deficit. The same approach would also, if applied to the Medicare Hospital Insurance trust fund, conclude that the 2010 health law adds to the deficit.

Point #2: It’s true that literal current law is unlikely to transpire, but this doesn’t change the reality that the ACA has worsened the federal fiscal outlook.

One of the few substantive criticisms made of my study is not that my answer was wrong but that I asked the wrong question. Specifically, some have said that I shouldn’t have compared the ACA to prior law because prior law was implausible. One commenter asserted in essence that the comparison was inappropriate because no one seriously believes that actual prior law would ever have played out.

I agree it’s virtually certain that prior law would not have transpired exactly as written, but the same should be said of the baseline employed to show a positive fiscal effect of the ACA. Under that baseline it’s assumed that the health entitlements and Social Security eat up a relentlessly rising proportion of the federal budget forever, and that there are no adverse consequences of rising federal debt upon interest rates or economic growth. The implausibility of the literal current-law baseline is thus not directly relevant here because neither baseline is plausible over the long run.

The analytical question at hand is not whether anyone believes that either actual current-law or CBO’s baseline would transpire, but what is the relative fiscal impact of the health care law compared to where we’d be without it. You don’t need to believe that otherwise Medicare payments would have been cut in 2016 to understand the ACA’s adverse fiscal effects. You only have to acknowledge that there existed a prior-law obligation for lawmakers to keep the accounts of Medicare HI (and Social Security) balanced in some way.

Point #3: There has long been bipartisan agreement that the approach to budgeting used in the ACA would worsen federal finances.

One of the ACA’s supporters further argues that comparing it to prior law is invalid because under literal law federal finances ultimately stabilize and we “don’t have a deficit problem at all.” Because no one really believes that, it’s argued that no one should believe that the ACA has worsened matters either.

First, it shouldn’t surprise anyone that under a literal current-law baseline much of the government’s projected fiscal problem goes away. Much of the anticipated fiscal problem arises from the projected imbalances in Social Security and Medicare. If Congress takes seriously its prior-law obligation to balance the books of those programs, then indeed much of the fiscal problem would be solved. That shouldn’t be a surprising result; it’s been a generally-accepted understanding of the federal budget for decades.

Some defenders of the ACA’s financing are making a very dangerous mistake: under their theory of the federal budget, we would no longer consider this statutory obligation to balance Social Security and Medicare as a serious prior-law constraint. This theory implicitly holds that every time we take action to shore up Social Security and Medicare, we are then free to spend all the proceeds of those actions without ever worsening federal finances.

By this theory, when Social Security was rescued in 1983 we could have spent all the savings on a vast new spending program without doing any fiscal harm. Also by this theory, when we get around to addressing Social Security’s current imbalance we can set up a new $6.5 trillion spending program, again with no harm done. Under this theory there was no fiscal harm when we used Medicare savings in the ACA to fund a new spending program, and there would be no harm if the next Medicare rescue establishes yet another program costing a further $3 trillion.

This thinking would not only worsen federal finances, it would lead to a fiscal disaster. Here’s why: CBO currently projects a long-term fiscal imbalance, much of which will be corrected when we balance Social Security and Medicare’s books. Under the ACA’s approach to budgeting, CBO would project a large fiscal imbalance even after Social Security and Medicare’s books are balanced. Moreover, unlike now, there would be no statutory constraints requiring that fiscal disaster be averted. That our fiscal situation would have worsened should be obvious.

This is not an original insight. This reality has long been recognized in Congressional budget rules supported by both parties. For precisely this reason, budget rules have forbidden the use of savings generated within Social Security as an offset for unrelated federal spending. The only difference here is that that the ACA made use of a rules loophole specific to Medicare HI.

Point #4: Under any apples-to-apples comparison to prior law, the ACA worsens the fiscal outlook.

Some defenders of the ACA’s finances are essentially arguing that we should disregard all prior-law constraints on Medicare spending arising under trust fund financing – on the grounds that these are politically implausible – while counting all of the ACA’s projected savings without regard for political plausibility. This method would indeed find that the ACA improves the fiscal outlook but it is not a balanced analytical approach.

There are two options for conducting a balanced appraisal of the ACA:

  1. Count all savings under law -- both under prior law and under the ACA -- without regard to political plausibility.
  2. Make judgments of political plausibility – on both sides, both pre-ACA and post-ACA.

The first approach is the one taken in my study’s “optimistic scenario.” I tabulated all cost-savings required both under prior law and the ACA without assessing whether they were plausible. Under this comparison, the ACA adds $352 billion to federal deficits over the next ten years (I use $346 billion because I credit $6 billion in savings to the ACA that CBO does not).

Alternatively, one could attempt to assess implausibility on both sides, docking both pre-ACA law and post-ACA law for any savings deemed politically implausible. Even with a heavy thumb on the scale in favor of the ACA, however, this analysis would still conclude that the ACA worsens federal deficits.

Consider some of the ACA’s most controversial cost-savings provisions – the Independent Payment Advisory Board, its other Medicare savings, the Cadillac plan tax, and the 3.8% Medicare surcharge. Even if we assume that two-thirds of these controversial provisions are fully enforced, while also assuming that only one-third of prior-law trust fund constraints would have been observed, the law adds over $360 billion to federal deficits over the next ten years. The law adds to federal deficits even if we assume virtually all (90%) of these controversial cost-savings are enforced, while assuming that almost no (10%) prior-law constraints would have been. See the table below.

Prior-Law Medicare Trust Fund Spending Constraints Assumed to be Enforced Assumption for Enforcement of ACA re Medicare Savings, Cadillac Plan Tax, and 3.8% Medicare Tax (UIMC) Net Fiscal Effect of the ACA
33% (1/3) 67% (2/3) $363 billion added to deficits, 2012-21
10% (1/10) 90% (9/10) $23 billion added to deficits, 2012-21

In sum, while the ACA’s supporters are correct that literal prior law was unlikely to transpire as written, this does not change the assessment of the ACA. A balanced analysis must conclude that it will add substantially to federal deficits in the years ahead.

Charles Blahous is a research fellow with the Hoover Institution, a senior research fellow with the Mercatus Center, and the author of Social Security: The Unfinished Work.

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