Thesis on "Health Care Reform Federal Deficit"

Thesis 15 pages (4331 words) Sources: 5

[EXCERPT] . . . .

The final score of the Patient Protection and Affordable Care Act with reconciliation amendments was released publicly 20 March 2010. The CBO and the Joint Committee on Taxation estimated that the act would lead to a net reduction in federal deficits of $143 billion over ten years, with $124 billion in net reductions from health reform and $19 billion derived from education provisions (Eakin and Ramlet, 2010). Total subsidies in the act exceed $1 trillion over ten years. They include insurance exchange tax credits for individuals, tax credits for small employers, the creation of reinsurance and highrisk pools, and expansions to Medicaid and the Children's Health Insurance Program (CHIP). To finance the subsidies and reduce the deficit, total cost savings are projected to be nearly $500 billion based on reductions in annual updates to Medicare fee-for-service payment rates, Medicare Advantage rates, and Medicare and Medicaid disproportionate-share hospital (DSH) payments.

The act also raises more than $700 billion in tax revenue from an excise tax on high-premium plans; reinsurance and risk-adjustment collections; various penalty payments by employers and uninsured individuals; fees on medical device manufacturers, pharmaceutical companies, and health insurance providers; and other revenue provisions.

To gain a rough feel for the longer-run impacts, we extrapolated the impacts to the years 2020 -- 2029 using the CBO's estimated compounded annual growth rates. Under this crude approach, the act is expected to yield an additional $681 billion in deficit reduction. The prospect of these savings is important given the daunting fiscal outlook. But the scenario raises an important question: Is it really likely that a large expansion of public spending will reduce the long-run deficit? The answer, unfortunately, hinges on provisions of the legislation that the CBO is required to take at face value and not second-guess (Eakin and Ramlet, 2010).

Alternative Budgetary Scenarios

A more realistic assessment emerges if one strips out gimmicks and budgetary games and reworks the calculus. A wholly different picture emerges: The act would raise, not lower, federal deficits, by $554 billion in the first ten years and $1.4 trillion over the succeeding ten years.

The list of budgetary features begins with the fact that the act frontloads revenues and back-loads spending. That is to say, the taxes and fees it calls for are set to begin immediately in 2010, but its new subsidies are largely deferred until 2014. This contributes to the illusion that the act reduces the deficit. Note that if revenues were delayed to start in 2014, the act's 2010 -- 19 net deficit impact would be $66 billion lower. Other dubious budgetary provisions fall into four scenarios: unachievable savings, unscored budget effects, uncollectible revenue, and already reserved premiums (Eakin and Ramlet, 2010).

Unachievable Savings

The first scenario removes spending cuts that the Centers for Medicare and Medicaid Services (CMS) will ultimately be unable to implement. These are composed of cost reductions through Medicare market-basket updates, the Independent Payment Advisory Board, Medicare Advantage interactions, and the lower Part D premium subsidy for high-income beneficiaries (Eakin and Ramlet, 2010).

Although the specifics of each differ, these provisions share two features. First, the act itself does not automatically reform Medicare in such a manner that will permit it to operate at lower budgetary cost. Accordingly, when the time comes to implement these savings, or those developed by the Independent Payment Advisory Board, the CMS will be faced with the possibility of strongly limited benefits, the inability to serve beneficiaries, or both. As a result, the cuts will be politically infeasible, as Congress is likely to continue regularly to override scheduled reductions.

A vivid example is the Medicare physician payment updates. Each year since 2002 the "sustainable growth rate" formula in current law has imposed cuts in payments to physicians under Medicare. And each year, Congress has overridden these cuts. Massachusetts and Tennessee provide recent examples of cases where insurance coverage expansion has led to substantial cost increases instead of savings. In 1994, Tennessee implemented a massive Medicaid expansion, eventually covering 500,000 additional residents. A decade later, the state abandoned the experiment after costs more than tripled, from $2.5 billion in 1995 to $8 billion in 2004, consuming one-third of the state budget. When the experiment unraveled in 2005, 170,000 enrollees were dropped.

More recently, in April 2010, Tennessee announced that because of cost overruns, the program would need to cut an additional 100,000 people from the Medicaid rolls.6 In Massachusetts, the state's Special Commission on the Health Care Payment System has produced payment recommendations in the wake of passing an individual insurance mandate and coverage expansions. But the commission's recommendations have not yet been enacted into law, so overall costs, which are growing 8% a year in Massachusetts, have not been slowed. It is likely that recommendations from the federally empaneled Independent Payment Advisory Board would follow a similar trajectory, notwithstanding requirements that would force Congress to adopt the recommendations or find comparable savings (Eakin and Ramlet, 2010).

Unscored Budget Effects

The second scenario highlights acknowledged costs that are not included in the CBO score. To operate the new health care programs over the first ten years, future Congresses will need to vote for $274.6 billion in additional spending. This unbudgeted spending includes discretionary costs of $7.5 billion for the Internal Revenue Service (IRS) to enforce and $7.5 billion for the CMS to administer insurance coverage. It also includes $50.0 billion in explicitly authorized health care grant programs and $209.6 billion for the Medicare Physician Payment Reform Act, which would revise the sustainable growth rate formula for physician reimbursement. All of these provisions are noted with caveats in the CBO's final reports to Congress, but none of them was factored into the final score of the act (Eakin and Ramlet, 2010).

Uncollectable Revenue

Scenario three questions the political will of Congress and directly refers to the excise tax on high-premium, "Cadillac" health plans. This tax was supposed to start immediately, according to the Senate's version of the reform law. After intense lobbying by organized labor, Congress relented and pushed the tax back to 2018. This raises the possibility that it will prove politically infeasible ever to implement the tax, as was the case with the Medicare Physician Payment updates explained in scenario one. Thus, the scenario shows the impact of not collecting the associated tax revenue of $78 billion over the next ten years.

Reserved Premiums

Scenario four focuses on Community Living Assistance Services and Supports

(CLASS) Act premiums for long-term care insurance and the potential increase in Social Security receipts. In principle, if Social Security and CLASS were to be "funded" programs rather than pay-as-you-go programs, these receipts should be reserved to cover future payments and not be devoted to short-term deficit reduction.

Specifically, the scenario shows the implications of reserving the $70 billion in premiums expected to be raised in the first ten years for the legislation's new long-term care insurance. In addition to this accounting sleight of hand, the legislation uses $53 billion for deficit reduction from an anticipated increase in Social Security tax revenue. The CBO estimates that outlays for Social Security benefits would increase by only about $2 billion over the 2010 -- 19 period, and that the coverage provisions would have a negligible effect on the outlays for other federal programs. If Social Security revenues do rise as employers shift from paying for health insurance to paying higher wages, we should move Social Security into more of a "funded" program, and the extra money raised from payroll taxes should be preserved for the Social Security trust fund.

Bottom Line

What is the bottom line? Removing the potentially unrealistic annual savings, reflecting the full costs of implementing the programs, acknowledging the unlikelihood of raising all of the promised revenues, and preserving premiums for the programs they are intended to finance produces a radically different bottom line. The act generates additional deficits of $562 billion in the first ten years. And because the nation would be on the hook for two more entitlement programs rapidly expanding as far as the eye can see, the deficit in the second ten years would approach $1.5 trillion.

The stakes could not be higher. As documented in CBO analyses, the federal deficit is expected to exceed $700 billion every year over the next decade, doubling the national debt to more than $20 trillion.1 By 2020, the federal deficit is projected to be $1.2 trillion, $900 billion of which represents interest on previous debt. In this environment, the anticipated impact of the act is to reduce the deficit by a modest $124 billion over the next ten years. However, this projection is built on a shaky foundation of omitted costs, premiums shifted from other entitlements, and politically dubious spending cuts and revenue increases.

Of course, this is not the only source of budgetary uncertainty. Proponents point toward the possibility that the act will "bend the curve" more than anticipated, thereby reducing health care spending in federal programs and beyond. In this light, it is… READ MORE

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