Ethics & Public Policy Center

Resetting the 'Obamacare' baseline

Published in Politico on December 16, 2010


Rising entitlement spending is already driving the federal budget off a cliff. But Obamacare would add fuel to the fire with the largest entitlement expansion since the 1960s. So it takes a special kind of audacity for Obamacare's apologists to continue to insist that the new law will cut the projected budget deficits. Evidence clearly shows otherwise.

For starters, the supposed deficit reduction over the next decade is built on standard budgetary smoke and mirrors.

It double counts premiums for a new, poorly structured long-term-care insurance program. The same $70 billion in startup premiums collected by the program are claimed for both deficit reduction over the next few years and long-term-care benefits beyond the visible budget horizon. Senate Budget Committee Chairman Kent Conrad (D-N.D.) called this gimmick “something Bernie Madoff would have been proud of.”

The law also flatly omits from the Obamacare books an estimated $300 billion in physician payments needed to avoid deep cuts.

But, most implausibly, the Obama administration wants us to believe that similar deep cuts in Medicare's payment rates for hospitals and other service providers — cuts that even the administration's actuary says are likely to cause providers to drop beneficiaries — can be relied on to pay for a permanent, costly entitlement expansion.

At the same time that these supposed “pay-fors” are shrinking, or vanishing altogether, the entitlements promised in the law are likely to grow well beyond what is advertised. The core promise of the new law is that low- and moderate-income households getting insurance through new state-run “exchanges” will have their premiums capped as a percentage of income.

Those just above Medicaid eligibility — 133 percent of the federal poverty line, or about $29,300 per year for a family of four in 2010 — will pay no more than 3 percent of their income toward coverage in 2014. That limit will gradually rise with household income, until those at four times the poverty level pay 9.5 percent of their income. At that point, taxpayers will be on the hook to pay for the rest of the insurance premium for those households.

The population potentially eligible for this new federal entitlement is large. The Census Bureau says there are about 111 million Americans under the age of 65 in households with incomes between 135 percent and 400 percent of the poverty line.

But the Congressional Budget Office forecasts that only 19 million people will be getting the new federal premium subsidies in 2019. That's because the law stipulates than any person offered qualified insurance coverage by an employer is ineligible for premium assistance offered by the exchanges, and the CBO expects most employers to continue sponsoring insurance plans. This would sharply limit the migration to the heavily subsidized exchanges.

But is that a reasonable assumption? Tennessee Gov. Philip Bredesen recently made the case that it isn't. He argued that Tennessee and other states would be better off dumping large numbers of state employees into the exchanges and ending state-sponsored coverage.

Moreover, each day seems to bring fresh news of private employers running the numbers to assess their options, the only prudent thing to do given the financial stakes involved. They are, no doubt, figuring out that tens of millions of U.S. workers might be better off getting premium assistance in the exchanges than with the less-generous federal tax break, which accompanies employer-paid insurance premiums.

For a family of four with $60,000 in cash wages in 2016, according to Stephanie Rennane and C. Eugene Steuerle of the Urban Institute, the new entitlement in the exchanges would be worth $3,500 more than the tax break for job-based coverage.

Over time, both employers and the labor market are certain to adjust to take advantage of the new subsidy structure. Employers with large numbers of low- and moderate-wage workers are likely to move them into the exchanges, even if it means giving their higher-salaried workers extra wages to compensate for the loss of the tax break for employer-paid premiums. As new businesses are formed, they could organize, in part, with a view toward taking maximum advantage of both the subsidies available in the exchanges and the tax break that remains for those with higher incomes.

The end result would be that enrollment in federally subsidized insurance in the exchanges would likely far exceed the 19 million people that the CBO has estimated. Indeed, the safe assumption is that an additional 35 million workers and their families with incomes below 250 percent of the poverty line — who would clearly be better off in the exchanges as opposed to on job-based coverage — could end up there over time, one way or another.

And when they do, costs will soar. The CBO projects that the premium-assistance program will cost about $450 billion from 2014 to 2019, but that cost would rise to $1.4 trillion if workers and their family members with incomes between 133 percent and 250 percent of the poverty line were to migrate out of their current job-based plans and into the exchanges on Day One. That's nearly $1 trillion more than the amount advertised by the law's supporters.

Voters were aghast when the CBO first announced Obamacare's 10-year price tag at about $1 trillion last summer — one big reason public support for the effort collapsed. When voters find out that the actual price is likely to be twice what's been advertised to date, the electorate will be incensed. And rightly so.

What's to be done? A starting point would be to put a realistic budgetary assessment on the federal books. The CBO will issue its revised federal budget projections in January and March. This means there will be opportunities to take a fresh look at the law's budgetary impact — especially with the likely migration of tens of millions of low-wage workers out of employer-sponsored insurance.

The CBO is an indispensable and professional organization. But it doesn't always get it right the first time, and it is forced by law to adhere to unrealistic assumptions. Congress should insist, when the new budget projections are issued next year, that they be based on a more realistic outlook for Obamacare's costs.

If the new Congress and the CBO take the opportunity to present the real cost of this massive entitlement expansion, the next step will be obvious: new legislation to unwind this fiscal folly.

Douglas Holtz-Eakin is president of the American Action Forum and a former director of the Congressional Budget Office from 2003 to 2005. James C. Capretta is a fellow at the Ethics and Public Policy Center and a former associate director at the White House Office of Management and Budget.

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