Reestimating Obamacare

Published October 23, 2014

National Review Online

During the long congressional debate over the Affordable Care Act (ACA) — i.e., Obamacare — one thing was certain: The Congressional Budget Office (CBO) would ultimately certify that the final legislation would lower future budget deficits.

It had to be that way. President Obama had made an unequivocal promise in a nationally televised address to Congress: He would not sign a bill that added “one dime” to projected federal deficits. The only way to make good on that promise was to have in hand a CBO cost estimate showing modest deficit reduction from the law’s provisions. CBO delivered what the president was looking for with its final cost estimate of the legislation in March 2010.

That CBO backed up Democratic claims about the legislation’s budgetary effects was not surprising. It was well known during development of the legislation that key Democratic staff members in the House and Senate were working very closely with CBO to shape the legislation. These staffers would send drafts of the proposed legislation to CBO, along with requests for advice on how to make the legislation look better from a budgetary perspective. And CBO would send back preliminary estimates along with suggested changes that would improve the “score.”

It’s worth noting that these transactions were entirely confidential — meaning that Republicans in Congress were kept in the dark. It is not unusual for CBO to provide confidential cost estimates to legislators for bills that have not yet been released for public consideration, and CBO has certainly worked with Republican majorities in the past on a confidential basis too. But the health-care legislation under development in 2009 and 2010 was not ordinary legislation. It was among the most complex pieces of legislation ever developed in Congress. It is very unlikely that Congress could have passed it without CBO’s significant analytical support throughout the entire process.

It also seems that the back-and-forth between CBO and key Democrats in Congress resulted in an implicit bargain: Congress would accept many of CBO’s suggested “tweaks” to improve the official cost estimate on the condition that CBO would provide support to claims of the fiscal virtues of the legislation. CBO has certainly delivered on its part of the deal. Agency officials have repeatedly asserted that they see no reason to back off their original projection of reduced future deficits from implementation of the ACA.

There are many reasons to be skeptical of CBO’s official projections. Among other things, critics have noted that the ACA relies on deep and unrealistic cuts in Medicare to make its numbers add up, double-counts some Medicare cuts (using the funds to pay for ACA spending, and for future Medicare spending as well), andunderestimates the expense of the new entitlement commitments. Small modifications in any of these assumptions would produce very different results from CBO’s official estimates.

And now a new analysis from the Senate Budget Committee (SBC) Republican staff provides even more evidence that the ACA will widen future deficits, not narrow them. What’s interesting about the SBC staff assessment is that it is based on CBO’s own numbers and analyses. The staff analysis uses as a starting pointCBO’s last estimate for the ACA, provided when House Republicans were preparing for a vote on repeal in July 2012. The SBC Republican staffers extrapolate the projection out to 2024 and find that, using CBO’s unadjusted methodology, the ACA would produce deficit reduction of $180 billion over the period from 2015 to 2024.

They then make two important adjustments to the numbers based on trends and findings identified in other CBO work. First, they reduce the expected savings from the Medicare cuts in the ACA because CBO has substantially reduced the Medicare-spending baseline. In other words, Medicare spending is expected to be lower than previously thought, for reasons other than the ACA, and so the ACA’s cuts will, in many cases, produce less savings than previously projected. Second, they reduce expected federal revenue collection based on a CBO report issued earlier this year that found that the ACA would induce about 2.5 million people to drop out of the labor force by 2024. The SBC analysis assumes about a 1 percent drop in taxable wage compensation over the coming decade.

With these adjustments, the extrapolation of $180 billion in deficit reduction from CBO’s last estimate becomes $131 billion in higher deficits over the coming decade — a swing of $311 billion.

Paul van de Water of the Center on Budget and Policy Priorities objects to this conclusion. He contends that the lowering of the Medicare baseline beyond the cuts enacted in the ACA is at least partially a result of the ACA itself. There is absolutely no basis for this assertion. He cites Drew Altman of the Kaiser Family Foundation for supporting evidence for this contention, but Altman offers nothing more than his own hunch that there is some connection. The truth is that health spending was slowing well before the ACA was enacted, and indeed has been slowing since 2003. Moreover, since 2009, there has been a precipitous drop in the rate of health-spending escalation throughout the developed world. So unless Obamacare’s supporters want to somehow take credit for trends going back to 2003 or for the deceleration of health spending in Japan and elsewhere, we are left with the much likelier conclusion that something else is going on that is entirely separate from the ACA.

Van de Water’s other argument is that the SBC staff exaggerates the lost revenue associated with the ACA-induced reduction in the size of the labor force, because some portion of taxable income is not associated with wages and salaries and therefore won’t be affected by a drop in labor-force participation. But much of the SBC analysis is based on a reduction in social-insurance taxes from a drop in wages and salaries, so even if van de Water is correct, the adjustment might amount to about $60 billion over ten years. That’s not nearly enough to invalidate the larger point that the ACA-induced drop in wage compensation will more than wipe out the supposed deficit reduction from the ACA.

It should be noted that the analysis by the SBC Republican staff does not take into account other adjustments that could be made to CBO’s last ACA cost estimate. Among other things, the medical-device tax is producing far less revenue than projected at enactment. If this and other similar adjustments were made, the expected deficit increase from the ACA shown in the SBC analysis would be even higher.

CBO’s official cost estimates are important, but they can be overrated too because they can be manipulated during the legislative process. Congress is adept at finding the path of least budgetary resistance — i.e., those provisions for which CBO will assign substantial savings or revenue but that are unlikely to work out as planned in the real world. Some judgment is therefore necessary to assess whether a cost estimate comports with reality. It was obvious in 2010, and more obvious now with the SBC Republican-staff analysis, that on several levels the official cost estimate of the ACA produced by CBO fell far short of telling the whole story.

James C. Capretta is a senior fellow at the Ethics and Public Policy Center and a visiting fellow at the American Enterprise Institute.

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