Earlier this month there was tremendous press attention to new data indicating that enrollment in the Affordable Care Act (ACA)’s health insurance exchanges had surpassed 7 million. The White House took a victory lap while much of the press, desperate to write something positive after months of reporting on website glitches and insurance plan cancellations, characterized the milestone as good political news for ACA supporters. Our national discussion, however, is missing the truly significant story here; what is unfolding before our eyes is a colossal fiscal disaster, poised to haunt legislators and taxpayers for decades to come.
It is quite possible that the ACA is shaping up as the greatest act of fiscal irresponsibility ever committed by federal legislators. Nothing immediately comes to mind as comparable to it. Certainly no tax legislation is, because tax rates rise and fall frequently, such that one Congress’s tax cut can be (and often is) undone by a later tax increase. The same is true for legislation affecting appropriated spending programs. But the ACA is a commitment to permanently subsidize comprehensive health insurance for millions who could not otherwise afford it, which the federal government has no viable plan to finance. Moreover, experience shows that it is very difficult to scale back such spending once large numbers of Americans have been made dependent on it.
Let’s walk through the salient features of this unfolding fiscal disaster:
An Expansion of Spending Commitments Comparable to Enacting Social Security, Medicare or Medicaid: Our biggest fiscal problems today stem from Medicare, Medicaid and Social Security costs rising well beyond original projections. The ACA was enacted even though these longstanding financing challenges have still not been met, and represents an additional expansion of federal commitments comparable to these other programs’ creations. CBO now estimates that the gross costs of the ACA’s coverage expansion will be $92 billion in FY2015, or about 0.5% of our total GDP of roughly $18 trillion. This far exceeds, even relative to today’s larger economy, the initial costs associated with the entirety of Social Security and Medicaid, and is comparable to the startup costs for all original parts of Medicare combined. Consider this: just five years after enactment the ACA will absorb more of our total economic output than Social Security did fully sixteen years after it was enacted.
Of course, after these initial rollouts, Social Security, Medicare and Medicaid costs grew far faster than originally envisioned, sometimes due to subsequent legislation, sometimes due to unanticipated healthcare cost growth. It wouldn’t be surprising for either factor to affect the ACA, which would be even more problematic for reasons given below.
A Worse Fiscal Environment: The ACA was enacted when legislators knew, or should have known, that they inhabited a fiscal environment in which such extravagance was unaffordable. Deficits (and debt) are far higher today than when the other major entitlement programs were created; millions of baby boomer retirements are swelling expenditures arising from previously-enacted Social Security and Medicare law. Someday historians will puzzle over the thinking that induced legislators to embark on a vast new spending program at the very moment it could least be afforded.
Unraveling Finances: Where will the money come from to finance the ACA’s health exchange subsidies and Medicaid expansion? No one knows. We do know that the ACA’s financing mechanisms are already falling apart. The ACA’s much-reported website glitches and enrollment shortfalls had actually suggested an upside; if enrollment continued to fall short of previous projections, it was possible that some of the fiscal damage could be contained. But if enrollment has picked up as the law’s financing mechanisms disintegrate, the fiscal damage will be worse than anticipated. Consider the following:
CLASS: The ACA’s “CLASS” long-term care provisions were originally projected to generate $37 billion in net premiums through 2015 ($86 billion over ten years). CLASS was later suspended due to its long-term financial unworkability, meaning these revenues have not materialized and will not.
Employer/individual mandate penalties: These were supposed to have brought in $12 billion through 2015, $101 billion over the first ten years. Because the Obama Administration has repeatedly delayed their enforcement, to date they haven’t brought in much of anything. Some ACA advocates are even beginning to downplay the significance of possibly ditching these mandates altogether, though they were central to the law’s financing scheme.
Medicare Advantage: The ACA was supposed to be financed in part by cuts to Medicare Advantage (MA) totaling $31 billion through FY2015, $128 billion over the first ten years. The White House recently announced that planned MA cuts will not go into effect after all.
Other controversial provisions: The ACA’s most controversial savings provisions – among them its ambitious Medicare provider payment reductions, the tax on so-called “Cadillac” health plans, and cost-saving decisions of the Independent Payment Advisory Board– have yet to be tested. Given that less-controversial provisions have failed to meet their savings targets, there is little basis for confidence that these more controversial ones will do so.
Worsening the Deficit: As I wrote previously, the ACA stood to add approximately $340 billion to federal deficits over its first ten years, assuming its provisions were all fully enforced. This is still misunderstood by those unfamiliar with federal budget processes, but can be explained as follows: the ACA unambiguously adds to federal deficits in that it authorizes more additional spending than it generates in additional tax revenues. However, Congressional scorekeeping rules direct CBO to assume that some of these spending increases would have happened anyway, although this additional spending would have required substantial changes in law and departures from historical practice. CBO is always explicit that its scores reflect Congress’s scorekeeping rules rather than the operations of actual law, but not everyone reads or understands these explanations.
In 2012 I calculated that the ACA would add over $500 billion to federal deficits if instead of fully maintaining the law as written, lawmakers thereafter handled its most controversial savings provisions according to historical precedent. I did not anticipate that several of the law’s other cost-savings provisions would also be suspended, delayed, or remain unenforced, a pattern which if continued will result in the ACA having still worse fiscal consequences.
CBO has been periodically updating its estimates of the gross costs of the law, but these re-estimates do not disclose how much the law’s net fiscal effects have worsened as its savings provisions have been discarded one by one. And lawmakers still have not received an official score of the law’s net effects relative to prior Medicare law, as opposed to the higher-spending baseline CBO is required to use.
When new enrollment figures were released last week, the national discussion focused on whether the ACA is fulfilling its coverage expansion goals. The largely unwritten and more important story, however, is that the ACA is rapidly becoming a colossal fiscal disaster as enrollment proceeds heedless of the concurrent collapse of the law’s financing structure.
Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21.
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