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The Real Stakes in the Medicare Debate

Charles Blahous | 10/23/2012
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As a public trustee for Medicare I am often asked how the program’s future may be affected by the current political debate. In my opinion, the most salient Medicare policy choice before us has been badly under-reported.

This campaign season is somewhat unusual in that the two sides agree that future Medicare cost growth needs to be constrained relative to its growth rates in recent years. The two sides even roughly agree on what the future growth rate needs to be, though they disagree on the best means of achieving it. This is atypical; more often historically one side is proposing to decelerate Medicare spending growth and the other side is attacking them for doing so.

The more fundamental choice this year has to do with the purpose of constraining Medicare spending: that is, what we should do with any savings achieved by slowing Medicare cost growth. Our choice pertains to whether we use the savings to either:

  1. Extend our ability to meet our commitments to seniors on Medicare, or;
  2. Fund an expansion of Medicaid/CHIP and a new system of federally-subsidized health insurance exchanges.

Choice #2 is embodied in the 2010 Affordable Care Act (ACA), which some refer to euphemistically as “Obamacare.” Much opposition to the law is rooted in the view that savings in Medicare payments should only be a means of furthering our ability to meet our commitments to seniors on Medicare, not used to finance another new federal health spending program.

As commentators frequently note, the Medicare cost-savings provisions of the ACA affect the trustees’ projections for Medicare “solvency.” To understand the choice before us, it’s critical to understand what solvency does and doesn’t mean.

Solvency – the status of maintaining a positive balance in the Medicare Trust Funds -- in effect measures our financial commitment to the program. If Medicare is solvent through a given date, that means we have committed sufficient financial resources to pay full scheduled benefits through that date. This is very different, however, from having furthered our ability to meet such a commitment.

The following illustration may clarify the distinction. Often discussed are the $716 billion in Medicare cost-growth cuts over the next ten years under the ACA. Let’s imagine three different hypothetical ways we might extend Medicare’s solvency with $716 billion.

  1. Imagine we had passed a law to cut the growth of Medicare costs by $716 billion, but containing no other provisions. This would both extend Medicare solvency by $716 billion, and improve our ability to finance benefits by that same $716 billion. The cost savings would reduce expenditures from the Medicare Trust Funds, so they would hold a positive balance for a longer period of time. Thus our commitment to finance scheduled Medicare benefits would be extended by that amount of time. Our ability to meet that extended commitment would also be improved by the near-term cost reductions.
  2. Now imagine by contrast that we did nothing other than to issue $716 billion in debt to the Medicare Trust Funds. Technically, this would also increase the balance of the Trust Funds and extend the period of time we are committed to pay scheduled benefits. But it would do nothing to improve our ability to finance benefits. We would have increased our commitment to Medicare without improving our ability to meet it.
  3. Now imagine a third scenario in which we enact $716 billion in real spending cuts to Medicare but simultaneously enact a new spending program that costs just as much. Just like scenario #2, we would have increased our commitment to Medicare without improving our net ability to meet that commitment. It does us (and seniors) no good to enact cost constraints in Medicare if we turn around and spend that money on something else.

Unfortunately the ACA (“Obamacare”) essentially enacted a version of scenario 3. If as a trustee I am asked, “Did the Affordable Care Act extend the solvency of Medicare?” the answer is technically yes, but with a huge caveat. The Medicare cost constraints in the ACA do add to the Trust Funds balance and extend our financing commitment to the program. But the law as a whole did not significantly improve our ability to meet our obligations to seniors, because it spent most of the proceeds of that savings on creating a new program.

The Congressional Budget Office analysis of the ACA spells all this out. (Technically the CBO analysis is of the projected effects of repealing the ACA, which is not exactly the opposite of the effect of having passed it, but the two concepts are quite close and CBO’s is the best available estimate.)

We can use the CBO analysis to split the ACA’s effects into Medicare and non-Medicare components:

As this graph shows, CBO projected the non-Medicare portions of the ACA to add $607 billion to deficits over the next ten years. At the same time, the law contains $716 billion in Medicare savings, extending the solvency of that program for additional eight years. The law’s non-Medicare provisions weaken our ability to meet those extended Medicare benefit commitments by over $600 billion.

To be precise, the ACA’s total new costs are actually much more than $607 billion. $607 billion is the net cost, incorporating offsets including $1 trillion in new taxes and $11 billion in other spending reductions. These new taxes fund a new program of subsidized health coverage with a net cost of $1.618 trillion over ten years. The gross costs of this coverage expansion are even higher.

This graph is oriented to clarify the opposing budget effects of the ACA’s non-Medicare provisions. The coverage expansion adds to the deficit. The law’s $1 trillion in tax increases appears below the 0 line because it reduces the deficit. So do the law’s relatively small non-Medicare spending reductions. But take all of these non-Medicare provisions together and they add $607 billion to the deficit. No matter how you look at it, this is bad for Medicare. It worsens our ability to meet whatever Medicare commitments we make by over $600 billion in the next ten years.

We thus face a fundamental value judgment: how should we prioritize? Should restrictions on the growth of Medicare payments better enable us to meet our previous commitments to seniors on Medicare? Or should we use the savings to finance a substantial coverage expansion for the uninsured? As the CBO analysis shows, there is not enough savings in the ACA (“Obamacare”) to pay for both.

Virtually every economic policy choice has winners and losers. The ACA makes a clear value judgment: it subordinates the interests of Medicare beneficiaries to those who would benefit from the law’s subsidized coverage expansion. This is true no matter how you interpret CBO’s scoring of the law. If you believe the law would reduce the deficit, then you believe we will effectively lower payments in Medicare to finance the new health entitlement. If instead you believe that we will use the Medicare savings to extend its solvency and make full Medicare payments for more years, our ability to finance that commitment would be weakened by adding hundreds of billions to federal deficits. In either view, the ACA as a whole weakens our ability to finance a given level of Medicare commitments.

If instead we do what “Obamacare’s” opponents suggest, we implement the opposite value judgment; we would devote Medicare savings to shoring up the Medicare program, but without providing federal subsidies to a new class of health beneficiaries.

My personal view (no doubt influenced by being a Medicare trustee) is that we should first be in a position to fully honor our commitments to Medicare before making untenable new commitments to a new class of beneficiaries. For that reason I would support repealing the new entitlement and using Medicare savings solely for Medicare. Others may make a different value judgment.

Opinions will differ, but everyone should make an informed choice: should we proceed with the ACA (“Obamacare”) plan of reducing Medicare payment growth to finance a new spending program, or should we instead ensure that Medicare cost reductions are used to benefit Medicare? We can’t do both. As President Bill Clinton might say, “It’s arithmetic.”

In my opinion this is the single most important health policy question currently before the body politic.

Charles Blahous is a research fellow with the Hoover Institution, a senior research fellow with the Mercatus Center, and the author of Social Security: The Unfinished Work.


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