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Issue Brief #3689 on Health Care

August 2, 2012

Obamacare Remains a Budgetary and Policy Disaster

By

Following the Supreme Court’s decision on Obamacare, the Congressional Budget Office (CBO) issued an updated cost estimate for the law,[1] which unsurprisingly is not strikingly different from its previous estimates. Nonetheless, an examination of CBO’s latest findings, along with other evidence, makes it clear that Obamacare remains a budgetary disaster.

What Can Be Learned from CBO’s Numbers?

The media once again focused on the supposed bottom line of CBO’s latest projections and reported that Obamacare will modestly—by $109 billion—reduce projected budget deficits over the coming decade. However, there’s more to this story, even using CBO’s optimistic assessment.

  • New entitlements. Between 2013 and 2022, new entitlement spending will reach $1.7 trillion even though the main entitlement expansions do not launch until 2014. Over a decade of full implementation, the new entitlement spending will approach $2 trillion. Moreover, this spending will increase at a rapid rate each year—6 percent annually from 2017 through 2022.
  • New taxes. Over the coming decade, Obamacare taxes will reach $1 trillion, including new taxes on workers’ wages and capital income, as well as taxes on insurers and manufacturers of medical products. These will get passed on to consumers in the form of higher prices and the taxes imposed on employers that will destroy jobs.
  • Not a “universal coverage” plan. In 2019, 11 percent of the population—29 million people—will be uninsured, 7 million more than CBO’s March 2011 projections. The main reason for the drop in coverage is the Supreme Court’s invalidation of mandatory state participation in Obamacare’s Medicaid expansion. States now have the option to expand coverage, and CBO’s estimates assume that some states will decline to participate altogether or will participate only partially.
  • Vanishing deficit reduction. Over the next five years, deficit reduction will total only $7 billion, which does not include the $5 billion to $10 billion the IRS will spend to implement key provisions of Obamacare, or the $8 billion the Administration is spending on a supposed “demonstration” in the Medicare Advantage program that representatives of the Government Accountability Office have testified has no clear purpose and should be terminated.[2] The Administration has also requested nearly $1 billion to set up exchanges in states that decline to do so. This additional spending wipes out all of the near-term deficit reduction and reduces the 10-year estimate to inconsequential amounts.
  • Higher premiums. Premiums for insurance offered in the state or federal exchanges will be 2 percent higher than previously expected due to higher-cost participants moving from Medicaid coverage into the premium subsidy system provided through the exchanges. This increase in premiums is the equivalent of another $300 in costs per family.[3]

What CBO’s Assessment Leaves Out

The budgetary implications of Obamacare are far worse than CBO’s latest projections indicate because of dubious congressional accounting practices and highly optimistic assumptions.

Double-Counted and Unreliable Medicare Cuts. CBO now projects that Obamacare’s Medicare and Medicaid cuts will reduce federal spending by over $700 billion over the coming decade. (Most of the cuts come from Medicare, although CBO did not break the estimate down by program.) However, these cuts are being double-counted.[4] The cuts are being used to replenish the Medicare trust fund for hospital and other institutional care and pay future Medicare claims. Over the next 75 years, this will add about $8 trillion to the government’s unfunded liabilities. Over the next decade, when the double-counted cuts are taken out of the equation, Obamacare adds at least $340 billion to projected budget deficits.

Medicare’s chief actuary has repeatedly pointed out that the cuts themselves are very unlikely to be sustained over the medium and long terms, because they would cause severe access problems for seniors. Defenders claim that Obamacare will slow the pace of rising Medicare costs by implementing more efficient ways of delivering services. However, Obamacare’s Medicare savings come from blunt, across-the-board payment rate reductions that are implemented without regard to the quality of care provided to beneficiaries.

The result is that Medicare providers will see a dramatic gap between what Medicare and private insurance pays for services. Medicare trustees project that the cuts will leave 15 percent of facilities with annual operating deficits by 2019 and 25 percent by 2030.[5] Those facilities would be forced to drop out of the Medicare program.

It is unlikely that Congress will ever let it reach that point, as demonstrated in the annual effort to avert scheduled cuts in Medicare physician fees (the “doc fix”). Thus, Obamacare’s supposed deficit reduction is an illusion.

Minimal Worker Migration. CBO’s analysis assumes that just 3 million to 5 million workers will lose their job-based insurance and migrate into heavily subsidized exchanges (either state-administered or federal).[6] This is a relatively small number, given that about 160 million Americans have employer-sponsored insurance today.

CBO acknowledges substantial uncertainty around these projections, and there are strong incentives embedded in the law to encourage migration to the exchanges. The massive subsidy system will be a magnet to draw low-wage workers out of job-based insurance. CBO estimates that a family earning twice the federal poverty level would get $11,300 more in federal subsidization through an exchange than they would receive through work.

If just 5 million more people migrate out of job-based plans compared to CBO’s base scenario, the total cost of the law would increase by $36 billion over a decade. If 10 million, 20 million, or 30 million more people migrate into the exchanges, Obamacare’s costs would soar.

Opting Out of Obamacare. CBO’s estimates depend critically on the assumption that Americans would comply with government mandates to avoid penalties, in part because they want to “comply with the law.” CBO assumes that millions will sign up for government-endorsed health insurance who might be better off paying the penalty and signing up for insurance later when they really need it.

The Supreme Court decision on Obamacare made it clear that the so-called individual mandate is constitutional only as an alternative tax paid by persons who choose to be uninsured rather than sign up for government-approved insurance. In other words, Obamacare is now properly understood as a choice between two perfectly legal alternatives.

No longer can the government argue that signing up for insurance is a “requirement” and “compulsory.” As the Supreme Court made clear, Congress had no authority to impose such a requirement. Thus, CBO estimates, which assume that the public will continue to perceive the law as imposing such a requirement, are on extremely shaky ground. If even a small percentage of Americans decide to pay the tax for some time before getting insurance, it could lead to a problem in the exchanges, with mainly the sick getting insurance and other, healthier Americans postponing enrollment until they need it—which Obamacare’s rules requiring guaranteed issue and community rating of insurance premiums allow.

Real Reform Needed

With America’s debt burden heading toward 90 percent of GDP this decade and spending on entitlements about to soar with the baby boomers’ retirement, America does not need another massive, unfunded liability. Regrettably, that is exactly what the country got with Obamacare. The law has set in motion the largest entitlement expansion in nearly 50 years, with no realistic way to pay for it.

The only solution is to stop implementation of the law before it is started so that Congress can work on a sensible plan that fixes the problems in health care without jeopardizing the viability of the American economy.

James C. Capretta is a Visiting Fellow at The Heritage Foundation and Fellow at the Ethics and Public Policy Center.

Show references in this report

[1]Douglas W. Elmendorf, Director, Congressional Budget Office, letter to the Honorable John Boehner, July 24, 2012, http://www.cbo.gov/sites/default/files/cbofiles/attachments/43471-hr6079.pdf (accessed August 2, 2012).

[2]James Cosgrove and Edda Emmanuelli-Perez, U.S. Government Accountability Office, “Medicare Advantage: Quality Bonus Payment Demonstration Has Design Flaws and Raises Legal Concerns,” testimony presented to the House Committee on Oversight and Government Reform, July 25, 2012, http://www.gao.gov/assets/600/592920.pdf (accessed August 2, 2012).

[3]Chris Jacobs, “$2,500 Premium Cut? How About a $2,400 Premium INCREASE…,” Freedom on Call Blog, July 25, 2012, http://www.demint.senate.gov/public/index.cfm?p=freedom-on-call&ContentRecord_id=e221386d-b262-4839-b001-2b3a4a90316d&ContentType_id=e915486e-a0be-46eb-9fff-75dc61f28710&Group_id=78a5977a-062b-4259-ae04-d82a78579699 (accessed August 2, 2012); and Douglas W. Elmendorf, Director, Congressional Budget Office, letter to Senator Evan Bayh, November 30, 2009, http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/107xx/doc10781/11-30-premiums.pdf (accessed August 2, 2012).

[4]Charles Blahous, “The Fiscal Consequences of the Affordable Care Act,” Mercatus Center, 2012, http://mercatus.org/sites/default/files/publication/The-Fiscal-Consequences-of-the-Affordable-Care-Act_1.pdf (accessed August 2, 2012).

[5]2012 Annual Report of the Boards of Trustees of the Federal Hospital Insurance and the Federal Supplemental Medical Insurance Trust Funds, April 2012, p. 217, https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/ReportsTrustFunds/downloads/tr2012.pdf (accessed August 2, 2012).

[6]Congressional Budget Office, “CBO and JCT’s Estimates of the Effects of the Affordable Care Act on the Number of People Obtaining Employment Based Health Insurance,” March 2012, http://cbo.gov/sites/default/files/cbofiles/attachments/03-15-ACA_and_Insurance_2.pdf (accessed August 2, 2012).

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