There is no escaping the consequences of fiscal mismanagement. That’s the lesson policymakers in Greece and the U.K. are teaching the world as their massive public sector debt and ongoing health and welfare spending commitments force harsh spending cuts and tax increases. But they could have avoided such slashing by reining in government spending before the financial crisis forced policymakers to play out a losing hand.
Unfortunately, President Obama and Democrats in Congress aren’t paying much attention. Instead, they have mirrored Europe’s poor choices by passing a new health care entitlement on top of existing Medicare and Medicaid commitments—gargantuan obligations that are already on course to force economy-sapping tax increases or consume every dime of federal revenues. We may not be Greece or the U.K. yet, but if health care “reforms” prove as costly as they seem, we will get there in short order.
To be fair, health care reform started with good intentions. President Obama insisted (correctly) that health care reform was necessary to “bend the cost curve” for health care, especially for government entitlement programs. But he instead embraced expanding government-run insurance, widening Medicaid eligibility to include 16 million new entrants, and offering private insurance subsidies to families making up to $90,000. All told, the number of Americans newly dependent on federal dollars for their health care insurance will be about 32 million.
Democrats defend their legislation by pointing to official scores from the Congressional Budget Office (CBO) that claim $143 billion in deficit reduction during the first 10 years of the new program, and nearly $1 trillion the following decade. But is that true?
For starters, the score is only accurate according to the technical scoring conventions of the CBO. In the real world, where things get messy and Congress doesn’t always do what it promises, the program won’t save money at all.
For proof, look to a recent Health Affairs article by Michael Ramlet and former CBO director Douglas Holtz-Eakin, which underlines what most already know: the legislation includes large “automatic” reductions in spending on Medicare “market-basket updates” for hospitals and nursing homes, as well as targets for Medicare savings generated from the Independent Payment Advisory Board that are unlikely to play out as advertised.
The authors argue, however, that the bill doesn’t reform Medicare in such a way that the program can effectively operate at lower cost. Thus, when it comes time to actually cut costs, the Centers for Medicare and Medicaid Services (CMS, which runs Medicare) “will be faced with the possibility of strongly limited benefits, the inability to serve beneficiaries, or both.”
Rest assured, Congress will find some way to override cuts and avoid the wrath of senior citizens. That’s what has happened since 2002 with the “sustainable growth rate” cuts for physician payments. There, Congress recognized that cuts would lower reimbursements to the point where doctors would refuse to see Medicare patients. While Medicare spending does need to be reined in, doing so by fiat has a poor track record.
Additionally, the authors conclude that the legislation is likely to drive costs up, not down. By adding up the unachievable savings and unscored costs (like $200 billion for increased Medicare physician payments), Holtz-Eakin and Ramlet expect that the deficit will increase by $554 billion in the first ten years and $1.4 trillion in the second decade. With the CBO currently estimating that the public debt in 2020 will be $20.3 trillion, or 90 percent of GDP, this means that health care reform could easily add about 3 percent to the federal debt in the next decade alone. (The debt figure could be worse, as CBO optimistically assumes an average GDP growth of 4.3 percent during that period, even though the U.S. has had growth below that rate for 25 out of the previous 30 years.)
In short, the legislation fails to deliver on the president’s promises to reduce federal health spending and lower the deficit. This means that the downside fiscal risks of the Affordable Care Act are sharp, largely unpredictable, and deeply irresponsible in light of current obligations. While the U.S. is still a more attractive investment than the existing alternatives in Europe or Asia, the clock is ticking. Medicaid expansion and subsidies start in 2014, after which real reforms will become even harder. Before then, Congress must repeal and replace the most egregious aspects of the legislation with responsible—and affordable—health care reforms that work.
Paul Howard is a senior fellow at the Manhattan Institute and the director of its Center for Medical Progress.