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The Medicare Trustees’ Report and the $8.1 Trillion Double Count

10:10 AM, Apr 24, 2012 • By JAMES C. CAPRETTA
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The 2012 Medicare and Social Security trustees’ reports have been released (see here and here). The headline is that the Medicare Hospital Insurance (HI) trust fund will have insufficient reserves to pay full benefits beginning in 2024 (the same year that was projected in last year’s report). Social Security will have insufficient reserves beginning in 2033 (three years earlier than projected last year).

medicare

The trustees’ reports always contain some interesting information, and that’s true again this year.

In 2010 and 2011, the Office of the Actuary felt compelled to issue separate “alternative” analyses of projected future Medicare spending because the scheduled cuts in reimbursement rates for providers of services to Medicare patients are untethered to reality. If the Medicare cuts planned for in Obamacare were actually to go into effect, Medicare’s reimbursement rates would plummet below those provided even by Medicaid by the end of the decade. If rates fell that low, hospitals and other providers would have no choice but to stop taking care of Medicare enrollees, thus causing severe access problems for seniors. That’s a completely unrealistic scenario for political reasons — Congress would never let it happen — and the actuaries have repeatedly said so over the past three years.

This year, the actuaries incorporated a more realistic “alternative scenario” for future Medicare spending directly into the trustees’ report. The alternative scenario drops the unrealistic cuts from Obamacare and assumes a permanent “doc fix” to prevent deep cuts in physician reimbursement rates. With these more realistic assumptions, Medicare spending is still headed through the roof. Indeed, in 2085, under the alternative scenario, Medicare spending would reach 10.5 percent of GDP, up from 3.7 percent today.

The other important story with respect to Medicare’s finances isn’t covered at all in the trustees’ report, however. That’s the double counting of Medicare tax hikes and spending cuts in the Obamacare legislation.

Earlier this month, Chuck Blahous, one of two public trustees for the Medicare program, brought renewed attention to this subject when he released a paper documenting the double count and quantifying its impact on the federal budget. According to Blahous, when cost estimates are adjusted to remove the effects of double counted Medicare “savings” provisions, Obamacare increases the deficit by as much as $530 billion over ten years.

Not surprisingly, when the results of Blahous’s analysis were printed in the Washington Post, Obamacare’s apologists became completely unglued. Here was a direct assault on a prized talking point — that Obamacare will accomplish the amazing twofer of expanding coverage and also reducing future federal budget deficits. Arguments to the contrary must therefore be discredited at all costs! So, within days of the release of Blahous’s paper, Paul Krugman, Peter Orszag, Paul van de Water, and others all pounced on and denounced Blahous’s findings as being without any merit whatsoever (to put it more politely than some of them did).

The problem for these defenders of Obamacare is that their case is so plainly at odds with common sense that no one who is presented with the facts will believe them.

And here are the facts.

The Medicare HI trust fund is supposed to operate like the Social Security trust funds. Its only “income” is from tax revenue, mainly from payroll taxes (the other Medicare trust fund, for physician services, drugs, and other outpatient care, is financed heavily by the general fund of the Treasury and is therefore very different in character from the HI fund). Since enactment in 1965, the political consensus has been that the HI program should operate within a solvent trust fund. That is, whatever benefits are paid by HI over the years should be covered in full by taxes dedicated solely to the HI program. That’s the whole point of the HI trust fund convention. The trust fund doesn’t hold real economic assets in it. It’s an accounting device. But the purpose of the convention is important nonetheless. It is supposed to ensure the program is self-financing over time.

Of course, that’s the same logic guiding the operation of the Social Security trust funds. Indeed, to understand the Medicare double count in Obamacare, it’s useful to think about an analogous Social Security scenario.

As of today, the trustees project that Social Security will have an $8.6 trillion unfunded liability over the next seventy-five years. That is, on a present-value basis, tax receipts are expected to come in $8.6 trillion short of promised benefits over the long-range projection period. That shortfall could be covered with a simple fix: an increase in the Social Security payroll tax from about 12.4 percent today (not counting the 2011-12 payroll tax cut) to about 15 percent in the years ahead (note: I wouldn’t recommend this!). That tax hike would solve the shortfall problem and ensure benefits could be paid in full well into the future.

Now let’s suppose Congress took up a piece of legislation to do just that. Over the next decade, such a Social Security tax hike would produce a large amount of revenue, probably on the order of about $125 billion annually. That would be more than enough money to simultaneously establish a large, universal entitlement to subsidized college education. Every person graduating from high school could get a huge break on their tuition, paid for by the government. In fact, if the cost of the college program were kept to $100 billion annually, the legislation would appear to reduce the federal budget deficit by perhaps $25 billion every year.

But imagine the outcry if Congress actually tried to pass such legislation? The public would be outraged at the thought that Congress was trying to use Social Security tax revenue to pay for spending outside of the Social Security program. And they would be right to be outraged, because it would constitute a double-counting of the same money. That $125 billion coming into Social Security would be authorizing and paying for future benefit payments from the Social Security program. If the same money were used to also stand up an unrelated $100 billion per year entitlement, the law would be authorizing two new spending commitments with one source of revenue. The budget would be far worse off compared to the situation in which a Social Security fix were enacted on a standalone basis.

This is one important reason why Social Security changes are not counted on the “pay-as-you-go” scorecard, the ledger Congress uses to ensure that legislation which cuts taxes or increases entitlement spending includes offsets to prevent deficit increases. If Social Security changes were included on paygo, then a payroll tax hike could be used to pay for something else, like a universal college entitlement.

Unfortunately, unlike Social Security, the Medicare HI trust fund is counted on paygo, which is why Congress was able to double count Obamacare’s Medicare HI tax hikes and spending cuts. The proceeds of those changes are recorded both within the HI trust fund (thus effectively authorizing future entitlement spending) and on the paygo scorecard, thus authorizing Obamacare’s Medicaid entitlement expansion and new premium credits in the health exchanges.

The result is a very deceptive shift in federal finances. On paper, it would appear that Obamacare has reduced substantially the government’s long-term unfunded liabilities. In 2009, before Obamacare, the Medicare trustees’ report showed the HI trust fund had an unfunded liability of $13.4 trillion over the next seventy-five years. In this year’s report, that unfunded liability is down to just $5.3 trillion. In rough terms, then, Obamacare would seem to have reduced the HI trust fund’s unfunded liability by about $8.1 trillion.

But, of course, because the HI taxes and spending cuts were counted on paygo, the government has now stood up permanent entitlement commitments in Medicaid and the state exchanges that exceed the $8.1 trillion liability reduction in Medicare. It’s just that those long-term liabilities are never reported anywhere because they are not paid from a trust fund.

Some Obamacare apologists have tried to argue that the rules have always allowed this double-count to occur. That is true. But in the past, the amounts were inconsequential. Not so with Obamacare. This legislation used double-counted Medicare cuts to create the largest entitlement expansion in a generation. Unless it is repealed, the fiscal consequences will be disastrous.

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