April 20th, 2012
Editor’s note: On April 10, Charles Blahous released a paper on the fiscal consequences of the Affordable Care Act. Below Blahous presents a condensed and modified version of that paper. In related Health Affairs Blog posts, Paul Van de Water and Len Nichols respond to the arguments Blahous raised in the April 10 paper and offer their own views on the ACA’s fiscal consequences.
The view that comprehensive health care reform must make a substantial positive contribution to repairing the federal fiscal outlook was one of the motivating principles underlying the March, 2010 passage of the Affordable Care Act (ACA). The ACA as enacted falls well short of that standard and would significantly worsen the federal government’s fiscal position relative to previous law. Over the years 2012-21 it can be expected to add at least $340 billion and perhaps as much as $530 billion cumulatively to federal deficits, while increasing federal outlays by more than $1.15 trillion over the same period (and by increasing amounts thereafter).
These adverse fiscal effects of the ACA are not everywhere understood because of widely-circulated analyses referencing prevailing scoring conventions of both the Congressional Budget Office (CBO) and the Medicare Trustees. Under these conventions the effects of legislation are compared not to literal prior law, but to a hypothetical baseline scenario in which it is assumed that scheduled benefits of such programs as Social Security and Medicare Hospital Insurance (HI) are fully honored despite statutory requirements that lower payments occur upon depletion of those programs’ Trust Funds. The prevailing scoring convention is useful and appropriate for many policy evaluation purposes, but it nevertheless obscures the fact that when savings already required under law to maintain Medicare HI (or Social Security) solvency are also used to finance a new spending program, the federal government’s fiscal position is unambiguously worsened. This is the case with the ACA.
The ACA contains many provisions designed to slow the growth of Medicare spending. The CMS Medicare Actuary has projected that had the ACA not been passed the Medicare HI Trust Fund would have been depleted in 2016. If that had been allowed to happen, Medicare HI payments would have been sharply cut in that year. Due to the ACA’s Medicare cost-savings provisions, these automatic spending cuts are no longer projected to occur at that time. Medicare HI is now projected to remain solvent until 2024, postponing forced outlay reductions until then. The ACA’s Medicare provisions consequently decrease the level of Medicare HI spending prior to 2016, but then increase it from 2016-2024 relative to previous law. The ACA only appears to have a positive fiscal impact if this important effect is entirely neglected.
One need not believe that Congress would have permitted Medicare’s HI Trust fund to become insolvent in this way in 2016 to understand the ACA has worsened the federal fiscal outlook. A more plausible scenario would have been that other savings would have been enacted to prevent Medicare HI insolvency. The prior-law constraint requiring such Medicare cost-savings to be enacted was, however, unaccompanied by any requirement that Congress also enact a large new health spending program. The net effect of the ACA, therefore, was to introduce the cost of a substantial federally-subsidized coverage expansion, while relying on Medicare savings already required under previous law. Thus, relative to previous law, the ACA leads to higher spending and higher deficits.
Congress Is Less Likely To Address ‘Solvent’ Programs
It is important to understand that this is not simply a technical point of reading the letter of the law in a way disconnected from real-world events. Historical patterns of political behavior demonstrate that lawmakers are much less likely to address cost growth in Medicare (or Social Security) when the program is deemed to be “solvent.” Whenever the solvency of one of these programs is further extended as has occurred under the ACA, the political imperative for change is diminished and more spending occurs as a result. Thus both by statute and as a matter of political economy, the ACA worsens the fiscal outlook.
Many people understood this instinctively when the law was originally debated. They wondered how a law could simultaneously extend the solvency of Medicare, provide subsidized health coverage to 30 million new people, and also reduce the deficit. The answer is that it can’t. The cost-savings in the ACA are insufficient to both extend Medicare solvency and finance a new health program without adding substantially to the federal debt.
None of this should be construed as a criticism of the prevailing scorekeeping conventions used to show a positive budgetary effect for the ACA, nor of the specific policy choices made within the new law. The prevailing scorekeeping conventions are indeed useful for many policy evaluation purposes. They do not, however, answer the question of how the change of law embodied in the ACA alters the federal fiscal outlook. Moreover, the policy choices made in the ACA can also be fairly defended and fairly criticized apart from the question of their fiscal effects when considered as a whole. The purpose of this study is narrower; to illuminate how the ACA in its entirety affects the federal budget.
The ACA’s Projected Cost Savings May Not Be Realized
The ACA is also subject to various further forms of financing risk, most especially the risk that several of its cost-saving provisions will not be enforced as currently specified. There are substantial risks for example that the costs of newly-established health exchanges will ultimately be larger than now projected, that rising projected revenues from provisions such as the “Cadillac plan” tax and the new 3.8 percent surcharge on incomes over $200,000/$250,000 will not fully materialize, and that the cost-saving recommendations of the Independent Payment Advisory Board (IPAB) might be legislatively overridden, among other risks. Moreover, it is already the case that one key provision of the ACA, the CLASS program – variously scored as contributing positively to the ACA’s fiscal effects by $70-$86 billion over its first ten years — is no longer expected to be implemented owing to its being financially untenable over the long term.
The various new taxes under the law could unleash a dynamic much like the one that now exists with the federal Alternative Minimum Tax (AMT). Under current-law projections, the AMT would bring in dramatically rising federal revenues over time because its income thresholds are not indexed. Each year, Congress acts to raise these thresholds so that rapidly rising numbers of Americans are not newly subject to the AMT. The ACA’s “Cadillac-plan tax” and 3.8 percent Medicare surcharge are similarly designed such that they would subject rapidly rising numbers of Americans to these taxes every year. If Congress simply allows the thresholds triggering these taxes to rise with general economic growth, they will produce far less revenue than currently projected. If these and other aspects of the ACA are not fully upheld as written but instead are handled more in keeping with legislative precedent, the net addition to federal deficits would rise from $340 billion over ten years to nearly $530 billion.
To ensure that ACA does not severely worsen the federal fiscal outlook, legislative corrections will be required before the law’s provisions are fully effective in 2014. First and foremost among these is the necessity of scaling back the cost of subsidies provided for the health exchanges established under the law. Roughly two-thirds of the exchange subsidies’ projected cost must be eliminated if the legislation is not to have an adverse effect on federal deficits, and the entirety of their costs eliminated if ACA is not to have the adverse consequence of further increasing federal health care financing commitments. So long as ACA increases these commitments, it cannot be said to embody effective health care reform.
Responses To Earlier Criticisms
Since my study was published, some supporters of the law have taken issue with its findings, asserting that it was inappropriate to compare the ACA to prior law on the grounds that prior law was implausible. 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 actual current-law or the hypothetical baseline would transpire, but what is the relative fiscal impact of the health care law compared to where we’d be without it. In that light, our fiscal situation has clearly worsened as a result of the ACA. One needn’t believe that otherwise Medicare payments would have been cut in 2016 to understand the ACA’s adverse fiscal effects. One must only understand that there existed a prior-law obligation for lawmakers to keep the accounts of Medicare HI (and Social Security) balanced in some way.
It has similarly been argued that comparing with prior law is inappropriate because under literal law federal finances ultimately stabilize, a result that some take to be surprising and unrealistic. It shouldn’t, however, surprise anyone that under a literal current-law baseline much of the government’s projected fiscal problem disappears. 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. This has been a generally-accepted understanding of the federal budget for decades.
To embrace the ACA’s approach to budgeting is to make a very dangerous fiscal mistake: under this theory of the federal budget, we would no longer consider the 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 we get around to addressing Social Security’s current imbalance we can set up a new $6.5 trillion spending program, with no harm done. This thinking would not only worsen federal finances, it would lead to a fiscal disaster. Under the ACA’s approach to budgeting, we would face a large fiscal imbalance even after the daunting work of balancing Social Security and Medicare’s books. 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.
Finally, under any apples-to-apples comparison with prior law, it is clear that the ACA worsens the fiscal outlook. We could indeed arrive at the conclusion that ACA has improved matters by disregarding prior-law constraints on spending beyond the resources in the Medicare HI Trust Fund — on the grounds that these constraints are politically implausible — while counting all savings under the ACA without regard to political plausibility. But this would not be a balanced analytical approach.
As long as we conduct a balanced analysis, we arrive at the conclusion that the ACA worsens federal finances. Under the assumption that all prior-law and ACA savings occur without regard to plausibility, the law adds to federal deficits by more than $340 billion over the next ten years. If we attempt to discount for political implausibility, we arrive at the conclusion that the ACA adds to deficits even if over 90 percent of its most controversial cost-saving provisions are fully upheld, while assuming that only 10 percent of the prior-law financing discipline of the Medicare HI Trust Fund would have been. Even with a very heavy thumb on the scale in its favor, the ACA clearly worsens the fiscal outlook.
This study has purposely stayed away from the many policy controversies surrounding the ACA. The adverse fiscal finding should not be construed as a criticism of the law’s individual policy choices when considered separate and apart. The purpose of the study is to illuminate the budgetary effect of the change in law under the ACA, a matter of considerable public policy importance that had been too long neglected in the debate before now.Email This Post Print This Post