Job #1 for the budget super-committee: cut the new health care entitlement’s cost

The next step in the process of addressing the government’s long-term fiscal imbalance will be taken by a bipartisan budget “super-committee.” The White House has publicly expressed the hope that this committee will “seek a balanced approach to larger deficit reduction.”

No deficit-reduction agreement can credibly be called balanced if it fails to do one thing: cut the projected cost of new spending enacted in last year’s health care law. Among the reasons:

Health care cost growth is a primary driver of the federal government’s financial problems. CBO’s own words make clear why all health entitlements, and particularly the new health entitlement, must be on the table:

“In CBO’s baseline projections, spending for health programs more than doubles between 2011 and 2021, rising by an average of about 7 percent per year and reaching $1.8 trillion in 2021. That spending is projected to represent 7.4 percent of GDP in 2021 — a jump of 1.6 percentage points from its share in 2011. Of that growth, higher spending for Medicare accounts for about 30 percent, higher spending for Medicaid accounts for roughly 40 percent, and the remainder stems primarily from the new subsidies to be provided through health insurance exchanges beginning in 2014.”

For further perspective, consider this. That 7.4% of GDP devoted to federal health programs in 2021 would exceed CBO’s baseline projection for all appropriated spending combined in that year.

Constraining the new spending is essential to strengthening Medicare. There are few easy answers to the question of how to strengthen Medicare financing for the long term. There is, however, one clear way to do so: by ensuring that savings achieved within Medicare are kept available to finance that program’s operations rather than being diverted to other purposes.

The new health law weakens our ability to finance Medicare because the projected net improvement in the government’s financial position under the law is only 37% as large as the additional amounts the law gives Medicare permission to spend. A solution to this problem requires that the non-Medicare components of the law be amended to be, at worst, deficit-neutral. This would represent the single best thing that this super-committee could accomplish from the perspective of Medicare financing.

People are not yet dependent on the new health exchanges. One of the factors rendering it so difficult to extract significant savings from Medicare and Medicaid is that so many people are already dependent upon them. As we search for savings in future federal health spending, we should first concentrate on benefits that people aren’t yet receiving. That in turn argues for putting the new law’s health exchanges — scheduled to ramp up starting in 2014 — at the very center of these efforts.

How to Do It:  The health care law establishes premium assistance for individuals and families between 133% and 400% of the poverty line. The 400% figure could be reduced by whatever amount is enough to ensure that the non-Medicare portions of the health law are no worse than deficit-neutral, with the sliding scale of premium support applied to that reduced income range. (Alternatively, if negotiators are determined that individuals and families up to 400% of the poverty level be served, then they should increase other non-Medicare savings in the law sufficient to finance this objective.)

Clearly, many elected officials are heavily politically invested in last year’s health care law. Were it not for such considerations, however, it would be obvious that spending on the new health exchanges is the first area that the deficit-reduction super-committee should target — not only to preserve the financing integrity of Medicare, but indeed to ensure a truly balanced approach to deficit reduction.

(This is a condensed version of an article that was published in E21.)

Charles Blahous is a research fellow with the Hoover Institution and a senior research fellow at the Mercatus Center. He serves as one of the two public trustees for the Social Security and Medicare programs. He is also the author of Social Security: The Unfinished Work.