How the Supreme Court can Reduce the Deficit: The Fiscal Impact of Ending Obamacare

Posted by Jeffrey Brown on Apr 10, 2012

Filed Under (Health Care, U.S. Fiscal Policy)

West face of the United States Supreme Court b...
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Last week’s U.S. news was dominated by the oral arguments before the Supreme Court of the United States (SCOTUS) on the constitutionality of the Patient Protection and Affordable Care Act (PPACA), also known more succinctly as the Affordable Care Act (ACA), or, simply, “Obamacare.”  Most of the news coverage revolved around legal issues, such as how to define a “limiting principle” that would distinguish health insurance from other goods and services.  A few of those analyses, including one by my colleague Nolan Miller at the University of Illinois, provided useful economic insights on these legal questions.

But what I have not seen much of – until now – is a careful analysis of the impact of repeal on the federal budget.  Yes, there is plenty of rhetoric around this topic, with Democrats arguing that PPACA saved money and Republicans arguing that it created a huge new entitlement.  But there has been very little careful analysis.

That changed today, when the Mercatus Center at George Mason University released a meaty new report written by Charles (“Chuck”) Blahous.  His analysis shows quite clearly that the Supreme Court now finds itself in the position of having an enormous impact on the long-run fiscal situation in the U.S.

As background, Chuck Blahous is one of two public trustees of the Social Security and Medicare trust funds, having been appointed to this post by President Barack Obama and confirmed by the U.S. Senate.  Previously, Chuck served all eight years of the G. W. Bush administration at the National Economic Council.  After spending over two decades in both the legislative and executive branches of the U.S. government, Chuck knows the ins and outs of federal budgets.  He is also widely respected on both sides of the aisle as a serious policy analyst.

In a nutshell, here is what Chuck’s careful analysis finds:

  1. PPACA is expected to increase net federal spending by more than $1.15 trillion over the next decade.
  2. PPACA is likely to add more than $340 billion, and perhaps as much as $530 billion, to federal deficits over the next decade.
  3. Despite these realities, government scorekeeping rules lead to deep confusion over the fiscal impact, and have the effect of making PPACA appear less expensive than it really is.

How can this be?  In part, the law “relies upon substantial savings already required under previous law to maintain the solvency of the Medicare Hospital Insurance (HI) Trust Fund.  These do not represent new net savings … but substitutions for spending reductions that would have occurred by law in the absence” of this act.  There are other issues at play as well.

All of this is “public,” in the sense that it has been disclosed in scoring documents by the Congressional Budget Office (CBO). But the CBO is constrained to report the effect of government tax and spending programs according to various scoring rules – even when those rules deviate substantially from the likely political or economic reality.  Skilled politicians have learned to use these scoring rules to their advantage.

As Chuck points out in his paper:

“A full understanding of the ACA’s budget effects requires appreciation of the distinction between two important points:

  1. CBO found that the ACAD would reduce federal deficits when a specific scoring convention was applied;
  2. The same analysis shows implicitly that the ACA would substantially increase federal deficits relative to previous law.

The paper is over 50 pages in length (including the helpful Q&A in the appendix), but is well worth a read if you want to know the details behind the calculations.

But if you don’t have time to read it, here is the bottom-line: “Taken as a whole, the enactment of the ACA has substantially worsened a dire federal fiscal outlook.  The ACA both increases a federal commitment to health care spending that was already unsustainable under prior law and would exacerbate projected federal deficits relative to prior law.  This is an unambiguous conclusion …”

Were the Supreme Court to strike down all or part of this Act, we should view it as an opportunity to revisit health care reform in a way that reduces, not increases, public spending.

10 Responses to “How the Supreme Court can Reduce the Deficit: The Fiscal Impact of Ending Obamacare”

  • JaaaaaCeeeee says:

    Your claim that that Obamacare will vastly increase our deficit is based on bad arithmetic. You point out that the ‘meaty analysis’ by Blahous supporting your claim, is finded by the Koch brothers. You also ignore that ignoring the rules of cost estimating, like Blahous does, would show the Republican Ryan budget as hugely bigger deficit fuel.

    See the trickery of this selective, bogus cost estimating: http://krugman.blogs.nytimes.com/2012/04/10/another-bogus-attack-on-health-reform/

  • Jeffrey Brown says:

    JaaaCeee.

    Yes, I read the Krugman piece too, and your points are take directly from his piece. If you have any independent thoughts on the subject, I would love to hear them.

    As for Krugman’s view, it is typical Krugman. First, levy an irrelevant attack against the author with whom he disagrees in an attempt to discredit him, rather than taking on the intellectual underpinnings of the argument. Here, he implicitly argues – and you endorse – that the author is bought and paid for by the Koch brothers. If you had any clue about Chuck Blahous, his past writings, his ideology, his training, etc, you would realize the absurdity of this statement. This is a guy who fought hard against the Cato-inspired free lunch view of Social Security reform, for example – hardly a position that would endear him to the Koch brothers. Yes, it is true that Koch brothers help fund the Mercatus Center, but so what? Should I ignore everything that the Economic Policy Institute says just because it is funded by labor unions? No – I should understand that because they are funded by unions, they are likely to only fund reports that are consistent with their world view. But I should not assume that the work they should do is garbage. Rather, I should read the report and make an intelligent assessment of the ideas.

    Second, go on to selectively criticize budget scoring rules that he would happily use in other circumstances when they meet his world view. This is not unique to him. Democrats AND Republicans, conservatives AND liberals, are all guilty of using whichever set of budget rules they like the best. As for whether “current policy” or “current law” is the appropriate baseline ought to be something over which people have stable preferences, if they understood them. The budget scoring rules are often counter-intuitive, and often a mess. Though I admit they have a purpose, which is to establish ground-rules. There are legitimate reasons to find any baseline problematic. But one’s view about the desirability of a particular baseline should not be a function of whether they happen to like its implications for a particular policy or not. The best I can tell, Chuck Blahous is one of the few people that has been intellectually consistent on this issue.

  • Nolan Miller says:

    I haven’t read Chuck’s full piece and, since you have read it, I don’t have to! Is there anything more to it than the known phenomenon that policymakers of both parties game the CBO’s scoring rules to make things seem less costly than they are? It seems like your points 1 – 3, slightly adjusted, would also apply to the 2001 & 2003 tax cuts, which were scored as if they would sundown.

    Is the part about double counting the Medicare savings a real point, or is it just another way in which following the CBO rules masks some of the true costs of any legislation?

  • Charles Blahous says:

    Hi, Nolan. Jeff suggested that I respond to your question and I’m happy to take a crack at it.

    I think the short summary would be that the two issues are closely related, though they don’t play out quite the same way under scoring conventions.

    They’re similar in the sense that the “dueling baseline” argument also plays out on the tax side. Under the “current law” baseline, an extension of 2001 and 2003 tax rates is presumed to add to the deficit, whereas under the CBO “illustrative alternative scenario” (thought of as a “current policy” scenario) they do not. And the arguments constantly go back and forth as to which measure is the “real” one.

    There’s an important difference, though. For scorekeeping purposes, CBO employs the “current law” baseline on the tax side, meaning that if lawmakers want to extend current tax rates, they have to gather enough votes to waive various prohibitions on increasing the deficit by that standard. That’s not the standard that is employed with the Medicare savings used to claim deficit-reduction under the ACA. There the literal “current law” prohibitions on spending beyond the trust fund’s means are ignored by convention. If literal “current law” were the scorekeping standard on both sides, then the ACA would be scored as increasing the deficit, just as extending 2001/03 tax rates is currently scored as doing so.

    Just for clarification in case it’s necessary — I’m not necessarily advocating this, just explaining the budget rule Congress uses.

  • Nolan Miller says:

    Thanks for taking the time to respond, Chuck. Let me see if I get it. By law, the Medicare Trust Fund must always have a non-negative balance. So, there is something odd about saying that the trust fund will be solvent until 2017 in the first place, since the trust fund MUST ALWAYS BE SOLVENT BY LAW. So, under this law, implicitly, something was going to happen in 2017 in order to keep the trust fund solvent. This is most likely a cut in expenditures (i.e., benefits).

    Now, ACA comes along and says that we’re going to save money and spend less out of the trust fund, and that is going to extend the trust fund’s solvency for another 12 years. But, since by law the trust fund must always be solvent, under current law we were already obligated to do those cuts.

    So, the Medicare savings isn’t real new savings at all, but rather savings we were obligated to find in the future but hadn’t been explicit about yet.

    In that sense, if ACA just explicitly recognized future cuts that would have to be made, it doesn’t seem how that can improve the fiscal picture.

    I think I get it now. Thanks again for your response.

    PS: I just read the Krugman piece. Please don’t take the fact that both of us referred to the 2001/2003 tax cuts as support for his point of view. I’m just trying to understand these rather arcane aspects of budgeting. You’ve been a big help.

  • Keith says:

    In response to a post critical of his blog Jeffrey Brown says:

    “Yes, I read the Krugman piece too, and your points are take directly from his piece. If you have any independent thoughts on the subject, I would love to hear them.”

    Very catty. What’s wrong with citing an experts remarks, especially if you don’t have that particular expertise. guess when Dr. Brown speaks let no dog bark.

  • Keith says:

    Well I hope I don’t get insulted for saying this but i don’t see why a government health care plan should decrease government spending.

    And as far as the different projections of the cost of the ACA go, I don’t have Dr. Blauhaos’ expertize, but I know predicting the future is a dismal endeavor even in a science like economics. But even accepting the good doctor’s thoughtful projections, we are not talking about a huge increase in spending given that the budget over the next decade will total over 36 trilliion in today’s dollars. We have a huge economy with historically (over the past century or so) low tax rates. It seems to me the shortfall could be made up with relatively small tax increases. And to the extent macroeconomics can predict anything with any precision the impact on our society would be minimal.

    I am disappointed by ACA because it seems to me and many others to do little to contain costs. Although it quite charitably extends health care to many Americans and does this without substantially increasing taxes it seems to also have the unstated goal of further lining the pockets of the health care industry.

    So, what I would like to hear is a plan that minimizes the increase in federal expenditures and contains health care costs while providing for the general welfare. hope to see a blog on that soon.

  • Jeffrey Brown says:

    Keith,

    You are right – I was far too “catty” as you put it. I meant to be a bit snippy, primarily because Krugman’s line suggesting that Chuck Blahous was just a stooge for the Koch brothers really bothered me a lot. But I see now that it came across even more harsh than I intended. So please accept this as a public apology.

    The reason I was so defensive was not on the substance of the discussion. It was due to the fact that I have known Chuck for over a decade, and he is one of the most ethical, straight-shooting, independent thinkers that I know. The fact that he chose to issue his work through the Mercatus Center, which has apparently received Koch funding, does not diminish in any way the point he was making.

    But, I appreciate having you read and comment on these blogs, and I should not have been as “catty” as I was in my response.

    Jeff

  • Jeffrey Brown says:

    No insults this time, Keith. :-) You say “I don’t see why a government health care plan should decrease government spending.”

    The answer is “it depends on what problem you are trying to solve.” If one is trying to solve the un/under-insurance problem, then you are right – there is no reason to expect the expansion of public insurance to reduce costs. Indeed, we would expect the opposite, both because a) there would be more people covered by the government, and b) it is well known that (on average), having more insurance increases health care spending.

    But during the debate over the ACA, a lot of the ACA advocates were also arguing that reform was needed to slow the growth of health care spending in general, and Medicare/Medicaid spending in particular. Indeed, a lot of time and energy went in to trying to find ways (often through creative government accounting) of being able to argue that the ACA would lower health care costs. But, sadly, there is actually very little in the legislation that would do this effectively.

    I should note my own view on this — it is *not* obvious what % of the economy we should be spending on health care, or how quickly it should grow. In my opinion, these are all the wrong questions. What we should be focused on is how to improve the efficiency of health care delivery, given the estimates out of Dartmouth and elsewhere that up to 1/3 of all health care spending in the U.S. does not improve health outcomes. That is more than enough to provide universal insurance coverage. The trick, of course, is how to improve health care delivery, and that is the big question.

  • Ric says:

    Well, I know a “bit” about nationalized standards for healthcare… and how it has been implemented on a “capitalistically driven incentive basis” under “state level jurisdiction for healthcare” by a federal government that realized the forever need to improve the entire nation’s general level of health…

    (A very dear friend of mine personally toured Ted Kennedy coast-to-coast) and introduced him to what became his initial orientation to nationalized standards for healthcare…)

    (Please note that the U.S. is plummeting on its position in general health when compared to other leading industrialized countries…)

    It seems everyone is missing the single point of costs:

    “Supply & Demand”

    Recently I saw a picketer’s sign saying : “I don’t want to die in a waiting line !”

    As though, given the relatively low numbers of health care practitioners (relative to our population)… It seems that the first order of business is to do something to increase the supply of doctors and nurses …

    We might do this by re-directing our war driven military budget to create a dozen new military universities … Then, we could really do something w.r.t. our promise of a “future” for our returning young people who signed up with the promise of the “G.I. Bill”..

    Some of the new influx of university graduates might be doctors and nurses… and we could then provide the additional health care services for the additional people that need Affordable Health Care…

    But this really comes down to a principle which we might not embrace here in the U.S. ..

    And that is: “to provide a FLOOR level of protection on life necessities for every man, woman and child…” and that concept doesn’t make a nation a “Socialism” … It just qualifies a nation as being a “SOCIETY”

    That means:

    We don’t let people starve
    We don’t let people freeze in winter
    We don’t let people die of heat stroke in summer
    We don’t let people die of preventable disease… AND we do everything possible to sustain life … It’s our most precious gift…

    So, does the woman’s sign effectively saying “I want health care, and I don’t want everyone else to have it…” prevail as the “sentiment of the land”…?

    Are becoming “Dog eat Dog”… have we reached “cannabilizing” the weakest segments of our population?

    Have we forgotten that “There but for the Grace of God, go I ?”

    … OR are we going to realign our priorities and look after the people of this country before we continue on as the “World’s Police Force” through continuing an unaffordable and unsustainable world wide military presence?

    Now, “nationalized standards” for health care-for-all DOESN’t mean much beyond Major Medical and routine physicals … The Healthcard industry still has opportunity for “top up” additional coverages…

    And, here’s another question for consideration:

    Why do health insurance companies retain as PROFITS those applications for claims that are NOT paid?

    In some countries, insurance companies are chartered as “fiduciaries”, able to make profits through administrative efficiences and investment returns … NOT on the predatory practice of refusing claims … ? (Claims NOT paid being allocated to experience rating pools of funds that are used to adjust future premiums…)

    AND, in most countries, health insurance companies are not permitted to profiteer or share in the profit margins of healthcare professionals… Here a Doctor can typically expect only 65 cents on the dollar of claim submitted … (Check out the dual “pricing” offered depending on whether the patient pays OR if an insurance company pays…)

    So, it’s priorities and “improper” profiteering … ?

    That’s where you’ve got to start…

    Until you get your intentions agreed to … all of this banter is just “noise”…