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The Debt Deal Will Undo ObamaCare

Thursday, August 4, 2011

Here’s how the debt deal could trim the massive expansion of health spending created in last year’s healthcare law.

The Budget Control Act of 2011 ties increases in the federal debt limit to cuts in spending on a dollar-for-dollar basis. In a deal described by one opponent as a “sugar-coated Satan sandwich,” President Obama agreed that Medicare should be put on the chopping block along with other federal programs. That could prove to be the thread that unravels the massive expansion of health spending created in last year’s Patient Protection and Affordable Care Act.

Under the deal, the first debt limit increase of $900 billion triggers a cut in spending of $917 billion over the next decade. Discretionary programs, including defense, would be subject to a cap that allows them to grow at 2.1 percent a year, rather than at the 8.5 percent growth we have seen recently. A second increase in the debt limit of $1.2 trillion is permitted if it is accompanied by an equal amount of spending cuts.

The budget act creates a special joint committee of Congress that is charged with producing a plan for the necessary cuts. Because the committee will be evenly divided between House and Senate, Republican and Democrat, it is doomed. Political hostilities will only heighten now that the hard-fought debt negotiations have been settled. Even if this new gang of 12 were able to agree on a plan, the chances that the full House and the Senate would pass it are nil.

That triggers a sequester—across-the-board spending reductions rather than nuanced policy. If policy makers cannot make policy, then a meat ax approach will do.

The budget act specifies that the Office of Management and Budget will calculate the amount of cuts and, on January 2, 2013, the president will order that they be carried out. This means President Obama (who will still be in office on that date even if he loses the next election) will preside over the largest budget cut in American history.

Because the budget act’s special joint committee will be evenly divided between House and Senate, Republican and Democrat, it is doomed.

The debt deal prescribes spending reductions that Washington will not be able to swallow. Defense would be cut by about $1 trillion between the initial reduction and the sequester. Other discretionary programs (which include everything from agriculture to veterans’ benefits) would also lose $1 trillion. Medicare would be cut by $120 billion—a relatively modest amount for a program projected to spend $6 trillion over the next decade, but a necessary part of the compromise between President Obama and House Speaker John Boehner.

But the Medicare cuts come on top of much larger spending reductions imposed last year as part of the Patient Protection and Affordable Care Act. According to the program’s chief actuary, Medicare would save $575 billion through 2019, primarily through reductions in payments to providers. The full impact of ObamaCare and the budget act through 2021, the last year of the sequester, is a cut in Medicare spending exceeding $900 billion.

As difficult as it will be to implement these enormous cuts in nearly every federal program except Medicaid and Social Security, this process does not end there. Another debt limit debate will be at hand in 2013, and Republicans will again demand dollar-for-dollar spending cuts. Unless the economy starts growing at unprecedented rates rather than the 1 percent growth we are seeing lately, the government will need to find another $2 trillion in cuts to get through the year.

President Obama will preside over the largest budget cut in American history.

Faced with this crisis, even President Obama would be forced to radically alter his priorities. Number one on the hit list will be healthcare, the main driver of debt and deficits long into the future. It will simply not be possible to allow federal health spending to grow 40 percent faster than the economy, both measured on a per capita basis.1 Under the extreme economic and budgetary duress that we may be under in the next few years, it would be folly to implement a new trillion-dollar health program that we cannot afford.

Of course, many unforeseen events could alter this apocalyptic vision. The economy could come back to life, although not enough to completely resolve our fiscal problems. Tax increases might be enacted, temporarily relieving some of the pressure for spending reductions, but slowing the economy. Political determination to cut the deficit could weaken. But none of these events alter the fact that our health programs promise more than they can deliver, and more than we can afford.

The new budget act will force policy makers to recognize that we cannot continue to make marginal adjustments in health programs in dire need of reform. It may even cause them to take action before it is too late.

Joseph Antos is the Wilson H. Taylor Scholar in Healthcare and Retirement Policy at the American Enterprise Institute.

FURTHER READING: Antos has recently published “The Debt Ceiling Deal: Kicking the Can Down the Road,” “Waxman-Rockefeller Tax Is a Bad Deal for Senior Citizens,” and “Top-down Controls Not the Solution: Response to Marmor, Oberlander, and White.” He has also written “Long May She Waive,” “Still No Good News for ObamaCare,” and “Confessions of a Price Controller.”
 

 

Footnotes
1. Author’s calculation. Excess cost growth for healthcare averaged 1.5 percent from 1990 to 2007 according to the Congressional Budget Office (see table 3-1 here). Nominal GDP per capita grew 3.8 percent over the same period, based on data here.
Image by Rob Green/Bergman Group.

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