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Yes, Health Reform Strengthens Medicare And Reduces The Deficit



April 20th, 2012

Editor’s note: On April 10, Charles Blahous released a paper on the fiscal consequences of the Affordable Care Act. Below Paul Van de Water responds to the arguments Blahous raised in the April 10 paper and offers his own views on the ACA’s fiscal consequences. In related Health Affairs Blog posts, Len Nichols responds to Blahous, and Blahous offers a condensed and modified version of his paper.

The official estimators have spoken:

  • Medicare’s trustees confirm that health reform has improved the program’s financial status:  “The financial status of the HI [Hospital Insurance] trust fund was substantially improved by the lower expenditures and additional tax revenues instituted by the Affordable Care Act [ACA].”
  • The Congressional Budget Office says that health reform will modestly reduce federal budget deficits: “CBO and JCT [the Joint Committee on Taxation] have previously estimated that the ACA will, on net, reduce budget deficits over the 2012-2021 period.”

Both statements are correct.

Normally, that would be the end of the story.  Opponents of health reform have muddied the waters with spurious charges of accounting skullduggery, however, and dispelling such confusion is always more challenging than creating it.

Here’s the bottom line:  Medicare is a part of the federal budget.  Therefore, spending cuts or tax increases that reduce projected deficits in Medicare also help reduce projected deficits in the overall budget.  It’s as simple as that.  Contrary to critics’ claims, no “double-counting” is involved.

This is hardly a new idea; back in the 13th century, Thomas Aquinas pointed out that one action can have two effects.  I’ve used the example of a baseball player who hits a home run: the home run adds to his team’s score and also improves his batting average.  Similarly, when I buy a chocolate bar, it increases both my consumption spending and my consumption of calories.  You can easily add your own illustrations.

No one is pretending that a dollar can be spent more than once.  The ACA increases HI taxes and reduces payment rates to hospitals and uses the savings to help offset the cost of providing health coverage to 33 million more Americans.  Those savings do not pay for additional hospital insurance benefits; health reform does not expand the HI program.

Of course, projected budget deficits would have been reduced much more if the Medicare savings had not been used to pay for the expansion of health coverage.  That’s true, but it doesn’t mean that health reform worsens the fiscal outlook.  From the start, President Obama insisted that health reform be deficit-neutral.  The resulting legislation represents an extraordinary achievement: near-universal health insurance that doesn’t add to the deficit.

Choosing a Baseline

In a recent paper, Charles Blahous tries to dress up the old double-counting argument in new clothing.   But here’s what fellow Medicare trustee and former CBO director Robert Reischauer says about the attempt:

Under accepted CBO and OMB scoring practices, legislative reductions in Medicare HI spending both reduce the deficit and strengthen the HI trust fund.  This has been the case under both Democratic and Republican Congresses and administrations.  Chuck’s “revelation” is not a new charge.  Some argued this point when the ACA was enacted.  It remains as misleading today as it did earlier.

Blahous is able to assert, contrary to CBO, that health reform increases the deficit only because he moves the goalposts.  In budget jargon, he changes the “baseline.”

The budget baseline typically follows current law, but for Medicare and Social Security the concept of adhering to current law is ambiguous.  The Social Security Act entitles beneficiaries to receive specified healthcare services and cash benefits.  Budget law, however, generally limits spending for federal programs to the amount of funding provided — which, in the case of programs with trust funds, means the amount that can be covered by trust fund income and assets.

Standard cost estimates assume that Medicare and Social Security are commitments of the government and that Congress will assure that promised benefits are paid.  This is not an arbitrary “scoring convention,” as Blahous terms it.  Rather it represents a sensible practice that CBO adopted from its start and a Republican President and Senate and a Democratic House enshrined in law in 1985.  The Balanced Budget and Emergency Deficit Control Act states that, for purposes of the budget baseline, funding is assumed to be adequate to make all entitlement payments required by law.

Blahous uses a different baseline, one that assumes that Medicare benefits will not be paid in full when the HI trust fund is depleted.  But he (and other opponents of the ACA) use it selectively — only for evaluating the ACA.  In assessing the federal government’s future fiscal situation, every analyst I know — including CBO, the Medicare trustees, and Blahous himself — assumes that Medicare and Social Security benefits will be paid in full.  Without this assumption, much of the long-run budget challenge would magically disappear, since Medicare and Social Security benefits would shrink to match the available revenue.

For example, the Balanced Budget Act of 1997 and the Deficit Reduction Act of 2005 — both of which Republican Congresses approved — included Medicare savings that were counted as reducing the deficit and improving Medicare’s financial outlook.  The Senate Republican Policy Committee rightly claimed credit for this result, and no one made charges of double-counting.

And just last month, House Budget Committee Chairman Paul Ryan (R-WI) touted how his budget plan would both “shore up Medicare” and reduce projected deficits.  In doing so, he employed the very Medicare baseline that Blahous criticizes.  And while his Medicare plan has drawn spirited criticism, no one discounted Ryan’s Medicare savings because of supposed double-counting.

Implementing Health Reform

Blahous also contends that we should not count some of the Medicare savings in health reform because Congress will not allow them to go into effect.  This claim is also off the mark.

In part, this charge reflects a misreading of history.  The record demonstrates that Congress has repeatedly adopted measures to produce considerable savings in Medicare and has let them take effect.  My colleague James Horney and I carefully examined every piece of major Medicare legislation enacted in the past 20 years; we found that virtually all of the Medicare savings in this legislation were successfully implemented.

The sustainable growth rate (SGR) formula for physician payments, which Congress has repeatedly prevented from taking full effect, is the exception here rather than the rule.  Even so, Congress has enacted deeper cuts in physician payment rates over the years than CBO originally thought the SGR formula would produce.  And, in recent years, it has fully paid for its changes to the SGR formula.

The Medicare actuary has raised questions about the sustainability of one particular category of Medicare savings in health reform — the reductions in payment updates for most providers to reflect economy-wide gains in productivity.  Although these concerns deserve a serious hearing, other experts see more room to extract efficiencies and improve productivity in the health care sector.

Notably, the Medicare Payment Advisory Commission (MedPAC), Congress’s expert advisory body on Medicare payment policies, generally expects Medicare to benefit from productivity gains in the economy at large.  That’s why it has recommended for a number of years that payment rates be adjusted for productivity gains.  MedPAC finds that hospitals with low Medicare profit margins often have inadequate cost controls, not inadequate Medicare payments.

Because the ACA’s productivity adjustments are now law, Congress would have to pass a new law to stop them from taking effect.  Under the statutory pay-as-you-go rules, that future legislation would have to be paid for, so that it didn’t increase the deficit.

In any event, both CBO and the Medicare actuary have always assumed that the laws of the land will be implemented, rather than hazard guesses about how future Congresses might change them.  Surely no one would want estimates to be based on such speculation.  Gail Wilensky, who ran Medicare under President George H.W. Bush, has expressed it this way: “It would be very hard to know what you would use if you didn’t use current law — whose view you would use.”

Bringing deficits under control will require making difficult trade-offs and tough political decisions on both taxes and spending, especially for health care.  If we can’t count any provision that is controversial and might later be changed, we would have to conclude that neither the Bowles-Simpson proposals nor the Rivlin-Domenici plan, nor any other such effort, would really reduce the deficit.  In fact, if we can’t count any provision that a later Congress might reverse, we can’t do serious deficit reduction.

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