One of the motivating principles underlying the passage of comprehensive health care reform was that it would substantially improve the federal fiscal outlook. But many are skeptical of claims that the law, known as the Affordable Care Act, or ACA, will simultaneously extend the solvency of Medicare, provide subsidized health coverage to more than 30 million new people and yet somehow reduce federal deficits. They are right to be skeptical.
The legislation greatly exacerbates projected federal deficits and increases an already unsustainable federal commitment to health care spending. Many do not understand these harsh realities because traditional government accounting methods - while useful in many respects - often obscure significant costs. Comparing the health care law to prior law, rather than the “alternate baseline” used by government scorekeepers, gives a complete estimate of the legislation’s fiscal effects.
Based on analyses published by the Congressional Budget Office (CBO) and the Medicare actuary, I project that relative to prior law, the legislation will add at least $1.15 trillion to net federal spending and more than $340 billion to federal deficits over the next 10 years, and far more thereafter. This sobering outcome arises even if all goes relatively well - that is, if the law’s cost-saving provisions are all successfully implemented. If, instead, future Congresses act roughly consistent with historical precedent, the law will add more than $500 billion to federal deficits in the next 10 years.
One of the key issues in understanding the law’s fiscal effects pertains to its use of Medicare savings. The law contains several provisions to slow the growth of Medicare costs, and under law, Medicare can spend the full proceeds of these savings. Government scorekeeping conventions, however, ignore this effect. Meanwhile, the law also establishes an expensive new health care benefits program to be financed with these same savings. Together, these provisions spend far more than the law saves and will substantially increase federal debt.
There also is significant risk that the law’s new programs will cost more than originally estimated. Take, for example, its new subsidized health exchanges. As currently designed, the subsidy levels would require low-income people to shoulder a rising share of their health care costs over time. The exchanges also are designed so that one low-income person will get a substantial direct federal subsidy when he buys insurance through the exchanges, but his equally low-income neighbor with employer-sponsored insurance will not. This could create substantial pressure on Congress to expand the subsidies later to address perceived inequities.
Similarly, many of the law’s cost-saving provisions may not produce all of the savings now projected. Already highly controversial is the law’s establishment of a new Independent Payment Advisory Board (IPAB) to produce Medicare savings. These might be legislatively overridden, or IPAB itself eliminated. Furthermore, many of the law’s tax provisions are designed, like the current alternative minimum tax (AMT), to capture rising numbers of taxpayers over time. If Congress acts to forestall these tax increases, as it has with the AMT, revenues from these provisions will be far less than currently assumed.
None of this is to assert that these cost-saving provisions are necessarily the wrong policy choices, only that their proceeds cannot safely be spent until we are certain these savings have accrued.
Many have wondered how possible Supreme Court rulings on the law’s constitutionality might affect its finances. As the above analysis shows, the worst-case fiscal scenario would be to uphold the law in its entirety. Similarly, the best-case realistic scenario would be to strike down the law in its entirety. An even better hypothetical outcome from a financial perspective would be to uphold the law’s cost-saving provisions while striking down its coverage expansion, but no one expects this.
A more complicated situation would arise if the court strikes down the law’s insurance-purchase mandate but leaves its other provisions intact. CBO has estimated this would improve the federal fiscal impact by $282 billion over 10 years. This would ameliorate its fiscal damage but not by enough to turn the law into a net improvement. Such an outcome also would have severe adverse effects for consumers and insurers, increasing insurance premiums by 15 percent to 20 percent (according to CBO) if the law is not otherwise modified.
That comprehensive health care reform has made our untenable fiscal situation still worse represents a substantial failure of governance. To fulfill its original promise of bending down the federal health care cost curve, the vast majority of its subsidized coverage expansions would need to be repealed. Alternatively, aiming for a weaker standard in which the law is allowed to add to federal costs but not to deficits, roughly two-thirds of the law’s health exchange subsidies would need to be scaled back or other budgetary offsets found.
Whichever fiscal goal is pursued, it is imperative that corrections be enacted before the law is fully effective in 2014. History shows clearly that it is very difficult to contain the rising cost of a federal entitlement once individuals have grown dependent on it. Only by scaling back the new spending commitments made under the law will health care reform make the positive contribution to the federal fiscal outlook that experts across the ideological spectrum agree is required.
Chuck Blahous is a senior research fellow at the Mercatus Center at George Mason University and public trustee for Medicare and Social Security. He is author of the center’s new study, “The Fiscal Consequences of the Affordable Care Act.”