Obamacare’s Doubtful Deficit Reduction

by Kevin D. Williamson
The law’s cost controls are economic and political fantasy.

The history of Obamacare is a litany of broken promises and daft optimism: If you like your coverage, you can keep it. Your premiums will be lower. “Obamacare implementation’s going to be great and people will love it.” Some of those promises have fallen apart all at once, but a key one is slipping away bit by bit, like the child’s sand castle that constitutes a beloved triumph for 20 minutes before being abandoned to the tide: the promise that the Affordable Care Act will reduce the deficit.

Ezra Klein, a practitioner of the “I would gladly pay you Tuesday for a hamburger today” school of budget analysis, has forwarded the claim that the law will reduce the deficit by some $1 trillion in its second decade — although he is more confident in that prediction than is the Congressional Budget Office, the source he cites for it, which habitually describes its ACA projections as “highly uncertain.” Still less certain is the Government Accountability Office, which has a hilarious name but whose insights into the Affordable Care Act are no laughing matter. Like the Medicare trustees, the Office of the Chief Actuary of Medicare, the CBO, and most everybody whose professional reputation is not intertwined with the purported technocratic brilliance of Obamacare, the GAO has some serious reservations about whether Congress and the White House will be both willing and able to enforce all of the cost-saving measures in the bill — including significant Medicare reductions — as well as the tax increases packaged with them.

The question of whether the ACA will increase or reduce the deficit turns on an ever-decreasing margin. In February 2011, the CBO estimated that repealing the ACA would add $210 billion to the deficit over ten years. (Because of the complex nature of the law, the impact of ACA on the budget and the impact of repealing ACA are not, as the CBO notes, the same number with the signs reversed. But repeal is what the CBO is estimating.) In May of this year, Representative Paul Ryan asked the CBO to estimate the deficit impact of repealing ACA, and the answer he got was that repeal would add only $109 billion to the deficit over the period from 2013 to 2022, a considerably smaller number that reflects the moving-target character of these projections. That $109 billion figure has to be taken in the context of the CBO’s projection of a cumulative deficit of $6.1 trillion during that period. The CBO’s best-case scenario, which assumes full and effective implementation of both cost-controlling and tax-increasing aspects of ACA, achieves a 1.8 percent reduction in the deficit over the coming decade. Not nothing, to be sure, but not a figure that leaves a lot of room for small political concessions, such as failing to hold the line on the cost of exchange subsidies or softening up on unpopular Medicare cuts, that would make this deficit-reducing bill into a deficit-increasing one.

Much of the projected deficit reduction under the ACA comes in the form of robust controls on spending in federal health-care programs, especially Medicare. One GAO estimate found that full implementation of ACA cost-control measures would reduce spending on Medicare from 6.2 percent of GDP in 2035 without the law to 4.7 percent — a very large reduction, one that grows deeper still “in subsequent decades as the effects of slower growth in Medicare spending compound over time.” That is the sort of thing I would like to see happen, but I would not bet on its doing so. The GAO throws cold water on that in the very next paragraph of its report: “The [Medicare] Trustees, CBO, and OACT [Medicare’s chief actuary] have questioned whether the cost-containment mechanisms enacted in [ACA] can be sustained over the long term.” That is because one of the ways that Medicare costs are to be controlled is by using a “productivity adjustment” to reduce payments to doctors and hospitals. What that means in brief is that the ACA authorities assume that just as the technology and automobile industries grow more productive over time, so should health care — at roughly the same rate.

But as the GAO points out, “factors such as the labor-intensive nature of the industry and the individual customization of treatments” render it “unlikely that actual health provider productivity will be equal to the economy as a whole.” Obamacare’s architects are counting on those productivity improvements to reduce Medicare spending; if they fail to, then the Independent Payment Advisory Board is charged with achieving the necessary savings. How? Nobody really knows. We are supposed to take its prowess on faith. Physicians and hospitals assume that since increasing premiums and co-pays is off the table, then the only way to achieve those Medicare savings is to cut provider payments, with the unintended but entirely foreseeable outcome that fewer doctors will take on Medicare patients. That’s how you expand medical access in theory but reduce it in practice.

The problem is that oldsters vote, and we’re getting more of them every year. Medicare and Medicaid cuts that leave doctors and hospitals collecting less than 40 percent of what they would collect from private insurers are going to have significant effects on the availability and quality of health care, especially with the number of Medicare recipients swelling. Keeping in mind the “daunting” task with which IPAB is charged, the GAO ran another simulation, a more realistic one, which “assumed that cost-containment mechanisms described previously are fully implemented and then begin to phase out; Medicare spending resumes its pre-PPACA growth rate by 2035. [The simulation] also assumed that spending on exchange subsidies is not constrained by a provision in current law that would otherwise limit growth of exchange subsidies.” The effect of those changes is enough to overwhelm the expected reduction in deficits.

If you can get past all those numbers and projections, what this really comes down to is that you can believe that Obamacare will reduce the deficit if you also believe that Congress and the White House will suddenly reverse their decades-long habit of knuckling under on Medicare expenses — and that the same gaggle of geniuses that can’t manage a website with a budget of a few hundred million dollars is going to keep within a 2 percent margin of error when managing a multi-trillion-dollar entitlement over coming decades. If Ezra Klein or anybody else would like to place a largish bet on whether that does in fact come to pass, I am entertaining wagers.

— Kevin D. Williamson is roving correspondent for National Review.

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