The fiscally correct solution for ObamaCare

Charles Blahous:

Most of the debate about the Affordable Care Act has centered on how it affects health care. It’s time to pay attention to how ObamaCare has damaged federal finances. Lawmakers must bear in mind, even as they balance other important value judgments affecting the health and income security of millions of Americans, that the current repeal-and-replace effort represents a unique, fleeting opportunity to accomplish essential fiscal corrections.

Three factors contribute significantly to widespread confusion about the ACA’s damaging fiscal effects. The first is that many of the provisions designed to finance its expansion of insurance coverage haven’t borne fruit. Various financing provisions have instead been repealed, suspended, postponed or weakened by regulation.

More than half of the ACA’s projected deficit reduction over its first 10 years was to come from surplus operations of its long-term care program called Community Living Assistance Services and Supports, or Class, which was suspended in 2011 and repealed in 2013 because it was actuarially unsound. The ACA’s “Cadillac tax” was immediately postponed until 2018 in the 2010 reconciliation bill; later it was weakened and further postponed until 2020. The ACA’s health-insurance fees and medical-device taxes have been suspended. Expected revenues from the individual and employer mandate penalties were reduced, first by delaying their implementation and later via new exemptions. As these various financing mechanisms have been weakened or discarded, the ACA’s financial effect has become more unfavorable than even the most pessimistic critics predicted.

The second confusing factor is the complex system of scorekeeping rules Congress imposes on the Congressional Budget Office, which evaluates the budgetary effects of legislation. Those rules require the CBO to compare the effects of legislation to a baseline that differs from actual law in various critical respects.

Specifically, the CBO was required to compare its projections for the ACA to an assumption that lawmakers would otherwise enact legislation to increase allowable spending by the Medicare Hospital Insurance Trust Fund. The CBO projected that the ACA would reduce deficits only relative to this hypothetical Medicare spending increase; scorekeeping under the requirements of the existing Medicare law would instead have shown the ACA increasing deficits.

The third significant reason for confusion has been misinterpretation of intermittent CBO reports over the past several years on the evolving cost estimates for the ACA’s coverage expansion. These have tended to come in below initial projections due to lower-than-expected enrollment in the ACA’s insurance marketplaces, and to a deceleration in national health-spending growth that began before the ACA was enacted, but for which the data were not widely available until afterward. These reports of seemingly good fiscal news have only reflected certain specific pieces of ACA finances. We have not received similar reassessments of the ACA’s various financing provisions that have fallen apart.

Congress’s scorekeeping methods may understate the fiscal benefits of repealing the ACA. In a comprehensive study soon to be released by the Mercatus Center at George Mason University, I estimate that repealing all of the ACA’s new spending and tax provisions going into effect next year could cumulatively reduce federal deficits by more than $1 trillion from 2017-26. A projection based on Congress’s scorekeeping methods would estimate the reductions at roughly $590 billion, and more pessimistic assumptions at $230 billion. The higher estimates generally involve recognition that many of the ACA’s taxes (Cadillac tax, health-care insurance fees, medical-device taxes) may well remain uncollected even if the ACA isn’t repealed.

The CBO is required to assume that the ACA’s various taxes will all be collected in the future, even the ones that aren’t being collected now. The rest of us must be mindful of the ways that reality is departing from the scorekeeping assumptions. Recognizing these realities leads to the conclusion that the Republican repeal-and-replace bill, the American Health Care Act, could well achieve more than $650 billion in deficit reduction over 10 years, in comparison with the CBO estimate of $337 billion.

That said, there are also risks of overestimating the deficit reduction associated with repeal-and-replace. The latest CBO report makes aggressive assumptions about the numbers of Americans who would ultimately receive expanded Medicaid coverage if the ACA remains on the books, as well as for the individuals who will drop from Medicaid if the AHCA is enacted. If the CBO’s assumptions are overstated, that would be good news in a sense: Fewer Americans would lose coverage under the AHCA. But it would also mean less deficit reduction. If there would be less enrollment in health marketplaces and Medicaid under the ACA than the CBO now projects, then the AHCA might be barely budget-neutral over 10 years.

Lawmakers will undoubtedly concern themselves with many policy objectives as they consider modifications to the AHCA. They would be prudent, however, to ensure that anything signed into law repairs some of the fiscal damage done by the ACA. This will require them to be cognizant of real-world fiscal effects that may not be fully captured in Congress’s current scorekeeping methods.

Remember: Health care is a service you buy, not a right. If repealing ObamaCare will cut the deficit by that much, pull the plug now.

 

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