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Budget Committee Report Confirms the ACA Worsens the Deficit

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Budget Committee Report Confirms the ACA Worsens the Deficit

November 3, 2014

A recent Senate Budget Committee (SBC) Republican report about the fiscal effects of the Affordable Care Act (ACA, or so-called “Obamacare”) has stimulated public and press interest.  The report concluded that whereas earlier analyses appeared to find the ACA would reduce deficits, updated analysis employing Congressional Budget Office (CBO) methodology finds it is worsening deficits.

I am already on record as finding that the ACA worsens federal deficits, albeit for different reasons than the SBC study. My 2012 study showed that the ACA worsened budget deficits relative to prior law; CBO’s earlier projection of deficit reduction was instead in comparison with a baseline scenario it is required to use under congressional scorekeeping rules.  Importantly, that baseline assumes substantial future spending increases will be enacted in any event. It’s only in comparison with this spending-increase baseline that the ACA appeared to reduce the deficit.  

Unlike mine, SBC’s study compares the ACA only to the scorekeeping baseline imposed on CBO. In addition, the SBC analysis updates projections for recent CBO findings concerning the ACA’s costs and its effects on the labor market.  I believe the SBC finding to be correct, as I will detail below.  If so, this means the ACA worsens the deficit irrespective of whether you compare to prior law (as in my study) or the scorekeeping baseline (as in SBC’s).

To grasp this, it’s helpful to understand the three main categories of ACA provisions:

 

Category

Budget Effect

CBO Updating Estimates?

#1: Expansion of subsidized health insurance coverage

Higher costs/higher deficit

Yes

#2: Medicare/Medicaid spending growth cuts

Lower costs/lower deficit

No

#3: Tax revenue increases

Higher revenues/lower deficit

No

 

The magnitude of #2 depends on whether one is comparing with prior law or the scorekeeping baseline.  In CBO’s earlier analysis comparing with the scorekeeping baseline, #2 + #3 was projected to be bigger than #1, creating the perception of deficit reduction.  Relative to prior law, however, #2 + #3 is less than #1, so the ACA worsens the deficit from that standpoint.  

SBC’s study updates estimates of #2 and #3 based on CBO methodology (CBO is already publishing recurring updated estimates of #1).  To do this, one must account for various developments since the last full CBO score of the ACA (technically, of its proposed repeal) in 2012.  Among these: 

1) Slower growth in health care costs is reducing the projected cost of the ACA’s coverage expansion (good).  On this, we have the numbers: CBO provides them.  For example, in 2012 CBO had projected that by 2021, the gross cost of these coverage provisions would be $242 billion annually.  By 2014, however, CBO had lowered that estimate for 2021 to $208 billion.

2) Slower growth in health care costs is reducing the savings projected from the ACA’s cost-containment provisions (bad).  We don’t have post-2012 CBO numbers on this effect; SBC estimates that these provisions will save $132 billion less through 2024 than previously estimated.  SBC’s qualitative conclusion is clearly correct even if the precise number is unknowable.  Basically, the less health spending there otherwise would have been, the less credit the ACA can get for cutting costs.  Accounting for this effect is necessary for consistency; since the ACA is credited for its coverage expansion provisions costing less as health care inflation comes down, we must also recognize that its cost-cutting provisions will save less.  

I will elaborate on this point because there appears to be some dispute about it.  Paul Van de Water, an analyst I respect, has argued that the SBC results are wrong because they are “assuming that health reform had nothing whatsoever to do with the substantial slowdown in health care cost growth in the past few years.”  In effect he argues that the ACA should be credited with additional savings based on the assumption that it is at least partially responsible for the cost slowdown.

I disagree with that criticism for a couple of reasons.  First, it doesn’t square with CBO’s methodology, which is what the SBC study is intended to reflect.  CBO is explicit that when general health inflation slows, less relative savings can be attributed to the ACA.  For example, in 2012 CBO explained how recent changes in health spending assumptions affected its re-scoring of a proposal to repeal the ACA:

“CBO’s current projections of Medicare spending are lower than those in the January 2011 baseline. In aggregate, therefore, the projected increase in spending from repealing the Medicare provisions of the ACA is also smaller.”

This is another way of saying that the ACA’s Medicare growth cuts are saving less money than previously projected.  As this graph shows, when health spending projections were lowered from 2011 to 2012, the ACA’s Medicare/Medicaid savings dropped by $63 billion over 2013-21 (notably, $59 billion of this reduction was in the last five years of 2017-21, a roughly $12 billion change per year).

 

 

Health spending projections have continued to come down since 2012, so we’d expect CBO’s estimates of cost savings due to the ACA to continue to decline as well.  SBC’s estimate that the further savings reduction would equal $132 billion from 2015-2024 is reasonable, as it amounts to an adjustment of $13 billion a year.

The second reason we can’t assign the ACA extra credit for the national health spending slowdown is that the evidence is mounting pretty conclusively that the ACA has little if anything to do with it.  A striking graph (Figure 4-1) in the White House’s Economic Report of the President shows that the cost slowdown began well before the ACA was passed.  Another compelling graph shows that the slowdown occurred throughout all OECD nations, and thus can’t be attributed to US legislation.  Finally, the CMS Medicare actuary’s office has found that the ACA’s net effect so far has been to increase costs rather than decrease them.

3) Also, many of the ACA’s cost-savings provisions are not being enforced as originally assumed (bad).  Examples include the ACA’s individual/employer mandate penalties, scheduled Medicare Advantage cuts that have been rolled back, and others.  If this continues it will further worsen the ACA’s fiscal effects; the SBC analysis did not even take this into account.

4) CBO has since found that various ACA provisions (including its health insurance subsidies, Medicaid expansion, and new taxes) will significantly reduce labor force participation (bad).  CBO sees the ACA removing the equivalent of 2 million full-time workers from the workforce by 2017, resulting in slower economic growth and smaller federal tax revenues.  CBO writes that “CBO has now incorporated into its analysis additional channels through which the ACA will affect labor supply, reviewed new research about those effects, and revised upward its estimates of the responsiveness of labor supply to changes in tax rates.”  In other words, the 2010 analysis that appeared to show the ACA reducing the deficit failed to take into account what CBO now believes about its adverse effect on employment. SBC projects on the basis of CBO information that this effect will lower federal tax revenues by roughly $280 billion through 2024; Van de Water argues that the effect will be less, noting that wages and salaries represent only 70 percent of adjusted gross income. But either methodology should show enough of a revenue loss in combination with other updated information to find the ACA worsening federal deficits.

I showed in 2012 that the ACA will worsen the deficit relative to prior law.  SBC has now found that the ACA is worsening the deficit even relative to CBO’s scorekeeping baseline if one takes recent developments into account.  Taken together, it’s clear that previous hopes that the ACA would have benign budget effects have been wholly undone.

 

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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