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An Unfolding Fiscal Disaster

The calamitous finances of Obamacare.

Jul 14, 2014, Vol. 19, No. 41 • By CHARLES BLAHOUS
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Imagine that it is 1937 and time for the first Social Security payroll taxes to be assessed on workers and their employers. Two years earlier, President Franklin D. Roosevelt’s new program was successfully sold to the American public as an ambitious yet fiscally responsible, self-financing expansion of social insurance protections. The new Federal Insurance Contributions Act tax—a payroll tax of 2 percent on earnings—will pay for it.

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Free, that is, as in 0 billion

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Imagine further, however, that upon 1937’s arrival, FDR and Congress decide they don’t want to risk the problematic politics associated with imposing the payroll tax. And so, despite previous assurances of fiscal rectitude, they roll back the tax while leaving in place what eventually proves to be the single most expensive spending program in the history of the American republic. The result is a fiscal disaster of unprecedented magnitude.

Something eerily similar to this hypothetical scenario is now happening with the Affordable Care Act. The ACA was enacted in 2010 with the promise of reducing the federal budget deficit while expanding health insurance coverage. Nearly lost amid the recent press cheerleading over ACA enrollment figures is that this promise has disintegrated, and now no one—including, notably, the Congressional Budget Office—can say how much fiscal damage the ACA will ultimately cause. All we know for certain is that many of the savings provisions designed to pay for it have been shelved thus far.

CBO currently estimates that the ACA’s coverage provisions will cost the federal government $92 billion a year by FY2015. This is roughly 0.5 percent of projected U.S. economic output for 2015, well exceeding the relative costs of Social Security and Medicaid at similar points in their histories. (The amount falls just short of the proportion of GDP absorbed by all of early Medicare.) Worse, the federal fiscal position was far weaker when the ACA was passed than when Social Security, Medicare, and Medicaid were created.

Troubling though the ACA’s startup costs are, they represent only the tip of the fiscal iceberg that will be the fully phased-in law. CBO projects that its annual costs will hit $200 billion by FY2020, or nearly 0.9 percent of GDP. Yet this assumes that lawmakers will be content to allow the ACA’s health insurance subsidies to grow more slowly than low-income beneficiaries’ health care costs, as the law now stipulates. Thus there is every reason to believe that the ACA’s eventual costs will far exceed initial estimates, as happened with Social Security, Medicare, and Medicaid.

No sooner was the ink dry on the ACA than the law’s various “pay-fors” began to be tossed overboard, one after the other. The ACA’s CLASS Act (Community Living Assistance Services and Supports, a long-term care program) was financially unsound from the beginning, had to be suspended a little over one year later, and was eventually repealed. The original CBO score had assumed that CLASS would provide $86 billion of net financing for the ACA over the first 10 years.

Roughly $100 billion of financing in that first decade was also to come from penalties on individuals (for failing to carry health insurance) and employers (for failing to offer it). But the Obama administration has repeatedly postponed enforcement. Unsurprisingly, there is now a campaign to abandon the individual mandate penalty altogether, despite advocates having previously touted it as essential to the workings of the ACA. The administration has also been dropping cuts to Medicare Advantage required under the ACA, with the costs of these decisions still unknown.

Also unclear is whether the ACA’s reinsurance and “risk corridor” provisions will produce unexpected federal budget costs; these provisions were included in the ACA to protect insurers from financial losses if their exchange plan participants prove to be sicker and costlier than initially presumed. CBO assumes that the ACA’s risk corridor provisions will have net positive budget effects, based on previous experience with Medicare Part D. But Part D involved a very different incentive structure and participant pool; there is no telling whether the ACA’s exchanges will line up with that experience. Meanwhile, the Obama administration continues to promise both participating health insurers and taxpayers that they will each be protected from loss under the risk corridor provisions, though it remains unclear how both objectives will be accomplished.

What has caused the ACA’s financing to immediately unravel in a way that Social Security’s and Medicare’s did not? Part of the answer lies in the decision of the ACA’s advocates to push the law through Congress on a party-line vote despite public opposition. Social Security, by contrast, received overwhelming support from both parties in both chambers.

The ACA’s partisan origins have left lawmakers with vastly reduced incentives to achieve the budgetary savings required to make its finances work. Republicans, who saw the law enacted over their strenuous opposition, are unmotivated to support implementation of the ACA’s controversial tax increases, penalties, and Medicare cuts. This leaves Democrats, at both ends of Pennsylvania Avenue, with sole political ownership of these aspects of the law. 

After shaking a favorable score out of CBO in 2010 based on the assumption that the law would be enforced as written, Democrats now exhibit little motivation to follow through with its most politically radioactive savings measures. There is little reason to suppose that provisions looming on the horizon, such as the tax on so-called Cadillac health insurance plans and the decisions of the Independ-ent Payment Advisory Board, will be enforced any more diligently than others have been to date.

Much of this was predictable—indeed predicted—from the outset. After 1983’s Social Security solvency rescue, the two major parties were both invested in upholding politically painful measures such as delaying cost-of-living adjustments, imposing income taxes on benefits, and raising the retirement age. In 2010, on the other hand, a major federal spending expansion—as well as the controversial measures required to pay for it—was muscled through Congress by one party over the impassioned opposition of the other. That the finances of such a program are already proving politically untenable should surprise no one.

Charles Blahous is a senior research fellow at the Mercatus Center and a research fellow
at the Hoover Institution.

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