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January 31, 2011

Repealing New Entitlement Spending will Reduce Deficit

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In his State of the Union address, President Obama said that repealing his health-care law would increase the deficit by $230 billion. While technically true according to Congressional Budget Office estimates, this statement is misleading.

In CBO’s own words: “(the) legislation contained a set of provisions ... which CBO and (Joint Committee on Taxation) estimated would have a gross cost of about $930 billion. ... But (the law) also included a number of provisions to reduce federal outlays (primarily for Medicare) and to increase federal revenues (mostly by increasing the Hospital Insurance payroll tax and imposing fees on certain manufacturers and insurers).”

In other words, the health-care law reduces the deficit because the Medicare cuts and the new taxes and penalties exceed the vast new spending.

The estimated deficit impact of the bill was so important to congressional Democrats that several provisions were inserted into the bill to improve its cost outlook. One created a long-term care entitlement program, the Community Living Assistance Services and Support (CLASS) Program.

Long-term care

CLASS is open to any participants who pay premiums for five years, after which they become eligible for long-term care benefits if they meet specified criteria. The premiums they pay must match what other applicants of the same age pay — an amount that rises with age, but not with poorer health. Healthier individuals who desire long-term care insurance are very unlikely to participate because they will find better quality products at lower prices in the private market since they will receive credit (lower premiums) for being healthy. Therefore, CLASS will wind up with a risk pool of mostly disabled or very unhealthy persons.

According to the American Academy of Actuaries: “Given the way (CLASS) is structured, severe adverse selection would result in very high premiums that are likely to be unaffordable for much of the intended population, threatening the viability of the program.” The academy warned that “taxpayer funding and/or benefit reductions may be required.”

Panel recommendation

More recently, President Obama’s Deficit Commission recommended revamping or repealing CLASS. In its report, the commission stated that: “The program’s earliest beneficiaries will pay modest premiums for only a few years and receive benefits many times larger, so that sustaining the system over time will require increasing premiums and reducing benefits to the point that the program is neither appealing to potential customers nor able to accomplish its stated function. Absent reform, the program is therefore likely to require large general revenue transfers or else collapse under its own weight.”

Given the strong bipartisan objections, and the dismal actuarial and fiscal outlook for CLASS, how did it find its way into the health-care legislation? Because it reduced the CBO’s 10-year cost of the legislation by $70 billion.

CLASS is a deficit reducer in the short run because in the first five years (2012 through 2016) it collects premiums, which will be immediately spent to offset the costly subsidies and massive Medicaid expansion. But it pays no long-term care benefits. These initial cost savings are illusory.

CBO estimates that payments into CLASS will exceed payments out until 2030. (The Center for Medicare and Medicaid Services estimates that this will happen in 2025.) From then on, CLASS adds to yearly federal budget deficits with benefits being increasingly paid from general tax revenue.

Absurd budget windows

If initial premiums are set perfectly — a virtual impossibility, given the uncertainty of projecting a new program — then the present value of short-run program surpluses is exactly offset by the present value of future program deficits. And only the absurdity of 10-year budget windows shows that CLASS reduces the federal budget deficit.

We should highlight these facts every time the president claims his signature bill is fiscally responsible.

Brian Blase is a policy analyst in the Center for Health Policy Studies at The Heritage Foundation.

First appeared in The Youngstown Vindicator

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