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‘Not One Dime’: Health Care Law Projected to Add $6.2 Trillion to U.S. Deficit

Thursday, March 14, 2013

Congress is likely to follow precedent and bypass the new health care law’s draconian payment cuts to doctors and hospitals, causing the law's cost to balloon by trillions of dollars.

It turns out President Obama was right when he said his health care law wouldn't add one dime to the federal deficit.1 Figures from the Government Accountability Office suggest that the Patient Protection and Affordable Care Act will in fact add 62 trillion dimes over the next 75 years.2 (To give that $6.2 trillion some perspective, our national debt is currently $16.7 trillion.) Sometimes called the congressional watchdog, the GAO is the official auditor for the U.S. Congress. GAO is the agency that designated Medicare and Medicaid as high-risk programs because they are particularly vulnerable to fraud, waste, abuse, and improper payments. And it is likewise the agency that ultimately will be tasked with identifying all the bureaucratic snafus associated with Obamacare as it continues to roll out, affecting more and more Americans.

Federal Budget on an “Unsustainable” Path

In the meantime, GAO has issued a report that paints a bleak picture of Obamacare’s impact on our fiscal future. An important takeaway is shown in Figure 1.

No matter whether we use current law (labeled the “baseline extended” scenario) or current policy (labeled the “alternative” fiscal scenario), the January 2010 projections (calculated before Obamacare was written into law) show U.S. public debt3 is soon headed toward historically unprecedented4 and economically unsustainable levels.5 The baseline scenario essentially assumes we follow current law to the letter. Thus, for example, the baseline scenario for last fall assumed that Medicare would slash payment rates to physicians by 26.5 percent on January 1, 2013, since that was what the law at the time required. 

Figure 1

In contrast, the alternative fiscal scenario reflects the reality that actual policy sometimes deviates from the letter of the law: that is, ever since 2003, Congress has elected to postpone the required cuts in Medicare physician fees that are legally required by the Balanced Budget Act of 1997 (BBA), so the alternative fiscal scenario assumes this pattern would continue.  Likewise, for a whole host of reasons I describe later, it is unlikely that the draconian cuts in payments to physicians, hospitals, and other Medicare providers that are legally required under Obamacare will in fact be implemented. The alternative fiscal scenario assumes that just as it has managed to continuously postpone BBA-required cuts in physician fees, Congress will figure out a way to bypass the cuts required by Obamacare. The fall 2010 projections, which took into account the estimated budgetary impact of Obamacare — enacted the previous March — show that the law did not appreciably alter our fiscal fate.  As the GAO puts it: “Under either set of assumptions, these simulations show that the federal budget is on an unsustainable fiscal path driven on the spending side by rising health care costs and the aging of the population.” This assertion is as true after Obamacare as it was before. 

Unsustainable. Sound familiar? This is the very term a Treasury report used last December in its analysis of our nation’s long-term spending; it declared that “current policy is unsustainable.” The same term was used by the Peter G. Peterson Foundation (PGPF) in January to describe our current deficit path.6 Even the nonpartisan Congressional Budget Office (CBO) has used the term to describe current policies.7 Federal Reserve Chairman Ben Bernanke likewise used that word in congressional testimony to describe the debt trajectory projected by CBO.8 At the risk of belaboring the obvious, none of these are right-wing partisan hacks.

But wait! Aren’t all these assessments out of date? Didn’t the sequester put us on a substantially different fiscal path? Alas, no. The PGPF report shows that even if the budget sequester were fully implemented (which remains to be seen, as there is nothing to stop Congress from later choosing to restore all the sequester’s cuts), this would merely delay by one year the point at which federal debt will exceed 200 percent of GDP.

Sharp-eyed readers will see that, compared to what was expected before the passage of Obamacare, the GAO report shows that the new health law slightly improved the fiscal outlook using current law (baseline extended), but it made things slightly worse using current policy. Thus, whether things actually will get better or worse rests critically on which scenario will become reality.

Which Scenario Is More Believable?

But things go to hell in a handbasket under either the alternative or baseline extended scenario. It is merely when we arrive at the gates of hell that differs (by about 15 years). So which scenario is more plausible? Here are a few factoids to help you decide. Current law requires:

  • Medicare to slash physician fees by 25 percent next January (under the BBA).
  • Additional (Obamacare-required) cuts to physician fees so severe that by 2030, Medicare will be paying doctors 60 percent less than private health insurance plans (and nearly one-third less than Medicaid pays!).
  • Obamacare-mandated reductions in payments to hospitals so drastic that hospital prices for both Medicare and Medicaid will be around half those paid by private health insurers by the year 2040.
  • Eventually, payment reductions to hospitals will mean they are paid 61 percent less by Medicare and Medicaid than by private health insurers; physicians eventually will be paid 74 percent less under Medicare than private insurance.

What will the consequences be? Well, the Medicare actuary projects 15 percent of Part A providers (e.g., hospitals and other institutional providers) will have negative margins by the year 2019 and 40 percent will be in the red by the year 2050. That is, they will be at risk of insolvency. Historically, doctor fees in Medicaid have been far below those of Medicare (28 percent below Medicare rates in 2008). Not surprisingly, nearly one-third (31 percent) of physicians refuse to accept any new Medicaid patients versus 17 percent for Medicare. So what do you think will happen to seniors’ access to care once Medicare starts paying physicians less than what Avik Roy has labeled “America’s worst health care program”?

Such cuts portend huge problems in access for Medicare and Medicaid patients, either because providers will refuse to treat them or because facilities will literally have been driven to bankruptcy. And how do you think members of Congress will respond when hordes of frustrated seniors swamp them with complaints about not being able to find a physician or hospital within easy reach? Those who know a little history don’t have to guess about this:

  • Recall that after angry seniors swarmed the car of House Ways and Means Chairman Dan Rostenkowski over the Medicare Catastrophic Coverage Act (at the time, the largest expansion of the program since the enactment of Medicare), it took a mere three months for Congress to repeal all major components of the law.
  • Since 2003, Congress repeatedly has elected to circumvent legislatively mandated cuts in physician fees prescribed in the BBA.9
  • Steven Brill’s recent exposé revealed several instances in which Congress has bent to the pressure of medical lobbies to avert measures such as competitive bidding that promised to reduce Medicare spending by tens of billions of dollars.

Thus, unless Congress fundamentally changes its current practices or character, it will find a way to bypass the legislatively prescribed draconian cuts mandated by the Affordable Care Act, in which case the cost of the law will balloon by literally trillions of dollars.

An impressive list of government experts agree with this assessment. As the GAO report itself notes (p. 14), the Medicare Trustees, CBO, and Office of the Actuary in the Centers for Medicare and Medicaid Services (i.e., the Medicare actuary) all “have questioned whether the cost containment mechanisms enacted in PPACA can be sustained over the long term, due in part to the challenges in sustaining increases in health care productivity.”

Even if the budget sequester were fully implemented, this would merely delay by one year the point at which federal debt will exceed 200 percent of GDP.

Don’t trust government bureaucrats? Then try the independent, nonprofit, nonpartisan Committee for a Responsible Federal Budget: “It’s easy to say that the alternative fiscal scenario is probably a lot closer to where we are going, even if it has some flaws.” 

Did GAO Cook the Books?

Unfortunately, several myths about the GAO report are getting in the way of the public’s clear understanding of which scenario is the most plausible and what implications to draw from the GAO analysis. Media Matters was content to label Senator Sessions’s assertion that Obamacare would add $6.2 trillion to the deficit merely “misleading.” Others were substantially harsher:

  • The Rachel Maddow blog flatly declared “the Affordable Care Act is fully paid for” (i.e., won’t add one dime to the deficit), labeling claims to the contrary “one of the dumbest health care arguments to date.”
  • Kevin Drum at Mother Jones sneered such claims were “fever swamp nonsense” and “obviously moronic.”
  • At ThinkProgress we’re told that the assertion that Obamacare will add $6.2 trillion to the long-term deficit is “the most dishonest attack against Obamacare you’ve ever heard.”
  • The Huffington Post’s Bonnie Kavoussi parrots the foregoing “dishonest” accusation.

But it got even worse when Joan McCarter at DailyKos falsely claimed that GAO had been asked by Republican Senator Jeff Sessions to “cook the books.” In actual fact (as even Maddow's blog and Kavoussi later conceded after both making the same flagrantly false accusation), GAO had been asked to do no such thing. Instead it used an alternative fiscal scenario whose assumptions were nearly a carbon copy of those used by the CBO, Medicare Trustees, Treasury Department, and Medicare actuary in their own, independently derived long-term budget projections. The alternative fiscal scenario is nothing new: CBO has produced such policy estimates since at least the George W. Bush administration. As Jonathan Chait acknowledges, GAO likewise has used the alternative fiscal scenario in past reports; thus, GAO was not instructed by Sessions to “cook the books” using whacky assumptions (as too many Obamacare defenders appear to believe).

What Does the Alternative Fiscal Scenario Really Assume?

But even though the book-cooking myth appears to have been put to rest, Obamacare defenders nevertheless have significantly muddied the waters by their mischaracterization of the assumptions embedded in the alternative fiscal scenario (AFS).              

Figure 2: Changes in Noninterest Spending, Revenue, and the Primary Deficit in the
Baseline Extended Simulation      
 

Paul Waldman at the American Prospect claims that the AFS assumes that “all the ways to pay for the bill [Affordable Care Act], from cost savings, from innovation, to reduced payments to providers, to tax increases, were taken out.” Wendell Potter at the Center for Public Integrity (!) likewise argues the AFS rests on the assumption that “future lawmakers repeal all of the cost-saving and revenue-generating provisions of the law.” These bloggers are apparently following the lead of Aaron Carroll, who blogs with other progressives at the Incidental Economist and characterizes the AFS as “a worst-case scenario. They looked at what would happen to the deficit if (1) we left in all the spending, (2) all of the cost-control measures utterly failed, and (3) we removed all of the revenue streams/taxes.” This would make for a terrific story except that it’s not true.

Figure 3: Changes in Noninterest Spending, Revenue, and the Primary Deficit in the
Alternative Simulation

As it relates to Medicare spending, GAO’s AFS is identical to that of the Medicare actuary, whose assumptions and reasoning are fully codified here. As anyone willing to examine that document can see, Figure 4 shows that the Medicare income rate is identical under the current law and current policy scenarios. Specifically, income from the Medicare payroll tax (which includes the 0.9 percent add-on for high-income taxpayers that was imposed under Obamacare) rises from its current level of just over 3 percent of taxable payroll to over 4 percent of taxable payroll by the end of the projection period. Moreover, every single dime in new Obamacare taxes is presumed to be collected between now and 2020 ($685 billion in new taxes, according to CBO). Does that sound like removing all revenue streams and taxes to you?

Now it’s true that the AFS assumes that after 2020, federal revenues eventually migrate back to their historical levels (i.e., 18.1 percent of GDP).10 In contrast, the current law projections assume that Uncle Sam will be able to collect unprecedented levels of federal taxes between 2020 and 2086, equivalent to 20.2 percent of GDP. But since 1946, federal revenues have exceeded this level exactly once (in 2000, when they were 20.6 percent of GDP). Moreover, the current law scenario assumed that all of the Bush tax cuts would expire as scheduled under current law, yet in actual fact, the fiscal cliff deal permanently extended these tax cuts to everyone below $400,000 in income. So which set of revenue projections do you find more plausible?

Even if we accept the progressive premise that Americans stand ready to hand over federal taxes amounting to 21.4 percent of GDP in perpetuity (which is what GAO’s 2012 baseline assumes), the GAO analysis fails to support its contention that Obamacare improves the deficit. Compare Figures 2 and 3 above.

They show that between January 2010 (i.e., before Obamacare) and fall 2010 (after Obamacare) the primary deficit — which is the difference between revenue and noninterest spending — shrank by 1.5 percent of GDP under the baseline scenario, but increased by 0.7 percent  of GDP under the AFS. That is, averaged over the entire 75-year projection period, the deficit is expected to shrink or grow by these amounts. Obviously, if we took interest payments into account, our fiscal picture would look far more bleak.

What accounts for that 2.2 percent of GDP swing in the size of the deficit? Well, under the baseline scenario, projected revenue rose by 0.7 percent of GDP after Obamacare, whereas under the alternative scenario, projected revenue rose by 0.1 percent of GDP (further amplifying the inaccuracy of claims that the AFS zeroes out all new Obamacare revenue). In short, even if we assume that progressives got every penny of revenue assumed under the baseline scenario, this would not be enough to wipe out the projected increase in the primary deficit (which would shrink from 0.7 percent to 0.1 percent of GDP) under the alternative, more realistic fiscal scenario. Put another way, massive spending cuts account for nearly three-quarters of that 2.2 percentage point swing in the deficit. Which is to say that we will get this modest improvement in the deficit — which, remember, by no means solves our fiscal problem, it merely postpones the day of reckoning — if and only if we’re willing to endure the draconian cuts whose adverse consequences the Medicare actuary has tried to warn us about for three years now. Is anybody listening?

What’s astonishing is that Obamacare’s fiercest defenders apparently believe that “advocates of Obamacare have generally been very cautious about their predictions, and opponents very bold.” Seriously? An impartial reader might well draw a very different conclusion in light of the foregoing facts on the matter.

Christopher J. Conover is a research scholar at Duke University’s Center for Health Policy and Inequalities Research and an adjunct scholar at the American Enterprise Institute.

FURTHER READING: Conover also writes "Is U.S. Health Spending on Another Planet?" “In Sickness or in Wealth,” and "Bullets vs. Band-Aids: Is Health Spending Crowding Out Defense?" Scott Gottlieb discusses “Medicare's Temporary Reprieve.” Thomas P. Miller highlights “Obamacare’s Pressure Points.”

Notes:

1. The president seems to really like the “one dime” meme. In his latest State of the Union address, he was unequivocal: "Nothing I'm proposing tonight should increase our deficit by a single dime." In his September 9, 2009 address to a joint session of Congress, he pledged, “I will not sign a plan that adds one dime to our deficits.” In his State of the Union address earlier that year, he had asserted that “If your family earns less than $250,000 a year, you will not see your taxes increased a single dime. I repeat: not one single dime.”

2. Lest I be accused of putting words into GAO’s mouth, the $6.2 trillion figure was calculated by the staff of the Senate Budget Committee, whose senior Republican member is Senator Jeff Sessions. There is nothing mysterious about this calculation. Based on what had been publicly reported about how this calculation was performed, I did a “back-of-the-envelope” version: the alternative fiscal scenario shows that the “primary deficit” increases by 0.7 percent of GDP over the 75-year projection period (i.e., when the post-Obamacare projection is compared to the pre-Obamacare projection). I could not locate a figure in the GAO report, but the Medicare Trustees projected in 2011 that the net present value of GDP from 2011 to 2085 is $883.8 trillion (see Table III.B10). Net present value simply means in today’s dollars, where future dollars have been discounted back to the present using the interest rate that the federal government pays on its debt. So, 0.7 percent x $883.8 trillion = $6.2 trillion. I then checked with Senate Budget Committee staff, who reported that they had arrived at their figure more precisely by obtaining from the Medicare actuary the exact GDP and discount rate assumptions for every individual year, doing the equivalent calculation on a per-year basis, and summing up the estimated results. The staff also indicated that when they earlier shared their methodology with GAO, they were told it was a “reasonable method.”

3. Public debt excludes debt held by public agencies, such as the amount Treasury owes to the Social Security and Medicare trust funds for money borrowed in past years.

4. Last year, estimated gross federal debt exceeded 100 percent of GDP for the first time in over six decades, but 29 percent of this consisted of debts owed to public agencies. The only times the federal public debt exceeded GDP were in 1945 and 1946 in the immediate aftermath of the largest war the United States ever fought.

5. As I explained earlier, CBO does not even bother to report projections when public debt exceeds 250 percent of GDP. The conventional wisdom — based on several studies — is that the rate of a country’s economic growth slows measurably once public debt exceeds 100 percent of GDP.

6. After reporting that public debt would reach 200 percent of GDP even after taking into account all the efforts to slow spending over the past two years — e.g., the enactment of the American Taxpayer Relief Act on January 2, 2013, the Budget Control Act (BCA) in 2011, and the sequester and other automatic spending reductions under the BCA — the PGPF report states that “This unsustainable debt trajectory would be damaging to economic growth long before then, forcing policymakers to act much sooner to prevent a serious fiscal crisis and preserve national prosperity [emphasis added].”

7. In its most recent “Long-Term Budget Outlook,” CBO declared, “To keep deficits and debt from climbing to unsustainable levels, as they will if the set of current policies is continued, policymakers will need to increase revenues substantially above historical levels as a percentage of GDP, decrease spending significantly from projected levels, or adopt some combination of those two [emphasis added]."

8. On February 9, 2011, Federal Reserve Chairman Ben Bernanke testified before Congress that "By definition, the unsustainable trajectories of deficits and debt that the CBO outlines cannot actually happen, because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit."

9. As GAO notes, “Since 2003, Congress has taken a series of legislative actions to override scheduled reductions in physician payment rates that would otherwise occur under law. Physician fee updates set by Congress have averaged 0.9 percent per year over this period” (p. 8). The latest step in this charade came from the fiscal cliff bill, which included a provision to avert the 26.5 percent cut in physician fees that otherwise would have been required by the sustainable growth rate formula (SGR) created under BBA.

10. These assumptions are codified in Table 2 of the GAO report. They refer to the fall 2010 report put out by GAO. The GAO report also provided updated projections conducted in 2012, which use slightly different assumptions, codified in Table 4. But what readers should understand is that GAO’s analysis of the impact of Obamacare is based on comparing its fall 2010 projections to its January 2010 projections. That is the basis for the chart shown earlier and it is the basis for the calculation that Obamacare will add $6.2 trillion to the deficit compared to what would have happened otherwise. GAO’s explanation for why it relied on its 2010 projections rather than its 2012 projections is simple: “While we describe changes to federal health care spending when relevant to PPACA, we focus on the changes between our January 2010 and fall 2010 simulations, since this minimizes the effects of other legislative or technical changes unrelated to PPACA on our long-term simulations and can provide a general estimate of the act’s effects on the long-term fiscal outlook [emphasis added]” (p. 3). For readers who might be concerned that relying on “old” data might lead to erroneous conclusions, keep in mind that GAO found “The results of our more recent fall 2012 simulations for spending on Medicaid, CHIP, and exchange subsidies do not differ significantly from the results from the fall 2010 simulations that were run not long after the enactment of PPACA” (p. 50).

Image by Dianna Ingram / Bergman Group

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