Health Care Reform (3): Fantasies About Spending, Revenues, and Economic Forecasts

[This is the third in a series.  You can view the full series on one page here.]

My apprehension about the future of this country as it is now being reshaped by the current administration and congressional leadership was well-expressed a couple of days ago by a man who is far more knowledgeable about deficits, government spending, and economics than I ever will be.  In the aftermath of the health care legislation vote, Indiana Governor and former federal budget director Mitch Daniels said:  “In a life of optimism about America and its future, this morning I am as discouraged as I can remember being.”

If my amateur evaluation set out below is even half-correct, and if the newly-enacted health care legislation actually is translated from paper into full implementation in the coming years, we risk national insolvency, the punishing debt levels of an impoverished third-world nation, an ongoing and permanent recession, sluggish employment, declining standards of living for everyone, fewer opportunities for our children.  “The End of the American Dream.”  Apocalyptic words.  Are they more than the pessimistic ramblings of a conservative suffering a post-health-care-passage hangover?  After you read what I ’ve set out below, you can judge for yourself.

In the closing days of the arm-twisting campaign to build a slender House majority for his health care bill, the Washington Post reports that President Obama “draped one arm over [Pennsylvania Democratic Representative Jason] Altmire’s shoulder, turned away from the others and leaned in close to his intended target.”  “‘Jason,’ Obama said. ‘We have to do this.  It is essential to bringing down the deficit.’”

I’m not sure what unsettles me more about this story.  That President Obama would cynically appeal to a Democratic representative from a moderate district reluctant to vote for a new big government entitlement program by snookering him into thinking this health care spending program would reduce the deficit?  (To his credit, Rep. Altmire didn't buy it and still voted “no” on Sunday.)  Or that President Obama might actually believe that his massive new spending program will reduce the size of the federal budget?  If it is the latter, then the Obama White House has become an Orwellian enclave in which “Spending = Saving”.

Congressional Budget Office Estimates:  “Fantasy In, Fantasy Out”

But, someone may protest, the non-partisan, independent Congressional Budget Office (CBO) put its gold seal of approval on the Patient Protection and Affordable Care Act of 2010.  We are told the CBO assured Democrats that the latest, “fixed” version of the health care plan would save trillions of dollars.  In fact, just a couple of weeks ago while campaigning for his health care agenda in Pennsylvania, President Obama asserted that the legislation “brings down our deficit by up to $1 trillion dollars over the next decade because we’re spending our health care dollars more wisely. . .  Those aren’t my numbers.  They are the savings determined by the Congressional Budget Office, which is the nonpartisan, independent referee of Congress for what things cost.”

Well, not to mince words, but President Obama was both wrong and disingenuous.  Even with the questionable premises underlying the CBO estimate, President Obama’s plan was supposed to save a little more $100 billion in the first decade, not $1 trillion.  Not only was President Obama wrong, he was exponentially wrong by a multiplier of nearly ten.  (Oh well, a trillion dollars, a hundred billion dollars; potayto, potahto, tomayto, tomahto.)  When called on the error, the White House insisted that President Obama meant to refer to the trillion dollars of savings projected for the second decade (although the CBO carefully notes that projections that far into the future are not reliable.)

Moreover, every CBO assessment of the budgetary impact of a legislative initiative is based on a set of assumptions, both those offered by the bill drafters and those made by the CBO in its ongoing economic forecasts.  In particular, when bill-drafters promise future congressional steps, however improbable they may be, the CBO must proceed accordingly.  Thus, as former CBO director Douglas Holtz-Eakin explained in a New York Times column, when it comes to CBO projections, “fantasy in, fantasy out.”

To spell it out, if the bill drafters tell the CBO to assume that Congress will pay for new spending by making cuts in popular programs and by raising taxes even during hard economic times, the CBO must assume that will happen.  “But,” as the Washington Post observes, “that falls apart if a future Congress finds the cuts or taxes too painful to handle and overturns them.”

(As I’ll address in more detail in tomorrow’s post, the likelihood that Congress will have the necessary discipline to stay the course is greatly diminished when one party pushes through a partisan agenda over the unanimous opposition of the other party and against a majority of the citizenry.)

With that understanding, let me outline just a few of the guesstimates and contingencies underlying the supposed deficit-reducing features of the Democratic health care legislation.  You the readers can decide whether these suppositions constitute hard-headed, real-world premises by those serious about controlling spending or Disney-esque fantasies.

By the way, running the numbers himself, after “strip[ping] out all the gimmicks and budgetary games,” former CBO director Holtz-Eakin concludes that the health care legislation will raise the deficit by $562 billion.  In light of what I set out below and how the future is likely to unfold, I think that’s a low estimate and that the deficit would climb much higher, year-after-year.  If you’d like to look at the CBO analysis of the bill for yourself, it is here.

Fantasies About Government Spending and Revenues

The Medicare Shell-Game:  About half of the supposed savings necessary to prevent the health care legislation from adding dramatically to the deficit in its first decade comes in the form of promised future cuts of nearly half-a-trillion dollars from the Medicare program which provides health care coverage for elderly Americans.

Do we really believe that Congress will slice hundreds of billions of dollars in payments to doctors and physicians treating elderly patients and thus further jeopardize the quality of care for senior citizens?  And how can Congress make cuts of that magnitude when the Medicare program already is insolvent?  How do we reconcile the health care legislation’s promised increase in Medicare reimbursements to physicians beginning in 2015 with promised huge cuts from that same program?  In a letter to Speaker Pelosi clarifying its assumptions about the health care bill, the CBO itself noted that savings to Medicare may be difficult to achieve and that policies necessary to force such savings “might be difficult to sustain over a long period of time.”

Even if $500 billion in excess Medicare spending are somehow found, shouldn’t those funds be saved to stabilize the Medicare program?  But President Obama and the Democratic leadership instead want to reapply those savings to fund new health care spending.  The CBO has criticized the attempt by Democrats to count those reductions twice, both to shore up the Medicare trust fund and to subsidize the new health care universal entitlement programs (here and here).

The Medicaid Dump:  The scheme for extending universal health care coverage to the uninsured is to dump most into the Medicaid program for the poor that already is sinking fast because doctors are unwilling to treat Medicaid patients given very low Medicaid reimbursements.  Although the new legislation promises to increase reimbursement rates under Medicaid beginning in 2013, that incomplete increase may be inadequate to overcome a persistent shortage of available physicians.  And if Congress really does cut reimbursements to doctors treating senior citizens under Medicare to meet the deficit-reduction goal (as outlined above for the “Medicare Shell-Game”), how likely is it that Congress will not simultaneously cut reimbursement to doctors treating the poor under Medicaid?  In any event, if the new entitlement to universal care is not to be illusory, so that patients will be granted true access to quality medical care, it likely will cost considerably more than President Obama and congressional Democrats have been willing to acknowledge.

Importantly, the supposed deficit reduction savings in the bill for the second decade assumes that the federal government will eventually scale-back its contribution for the new Medicaid beneficiaries.  Being a financial partnership between the states and the federal government, Medicaid is funded by both federal and state government tax revenues.  To ease the pain on the states, the new legislation provides for the federal government to cover 100 percent of the costs for the expansion of coverage to the uninsured that is slated to begin in 2014.  However, the bill terminates that full federal pay-in after just three years.  As 2017 approaches and state governments begin to howl, will Congress be able to sustain the reduction in the federal outlay?  And even if Congress does make the hard decision to force the states to pick up a major financial share for this new federal mandate, will the states be financially able to do so?  Or will they be too financially strapped to continue the entitlement?

The Life Tax:  As the New York Times explains, the universal coverage of all persons regardless of preexisting conditions “cannot be achieved unless nearly all Americans are required to have coverage, so the costs can be spread among the healthy and the sick.”  Thus, as its controversial centerpiece, the Obama-Democratic legislation requires all adults to purchase health insurance, whether they wish to do so or not – or pay a tax penalty.  (If you recall, President Obama campaigned against the individual purchase mandate, sharply attacking Senator Hillary Clinton for including it in her health care platform.  Now he relies on it to prop up the bill.)

I have taken to calling this a “Life Tax,” because it is to be imposed on someone not based on economic activity or income but simply for being alive.  The uninsured are subject to this penalty for not doing us the favor of dropping dead and thereby ceasing to be a potential health care burden.  Nearly 30 states have already moved toward filing lawsuits challenging the constitutionality of the health care legislation, many of those states contending that Congress lacks authority under the Commerce Clause to force someone to buy a product.

Rather than judicial invalidation of the individual mandate, I think the greater likelihood is that the provision will simply miss the mark.  The mandate is to be enforced by the Internal Revenue Service (which many see as ominous).  But the bill forbids any criminal prosecution, lien, or seizure of property.  Moreover, in the early years, the penalty is small ($95 in 2014).  Thus, if a young adult has already made the economically sensible decision not to buy an expensive full-range of health insurance (and less expensive, catastrophic plans are not acceptable), do we really think a $95 fine that the IRS may not even be able to collect is going to change his or her mind?  What about when the penalty escalates in size in future years (eventually rising to $750 for an individual)?  And imagine the news media then broadcasting stories of thousands of young folks just starting out in life, being subjected to investigation by the IRS about the adequacy of their medical insurance, and being penalized for not having the right kind.  Won’t there be considerable political pressure on Congress to reduce the penalty, increase exemptions, fund full subsidies for insurance, or drop the mandate altogether?

In sum, it is far from clear that one of the financial linchpins of this plan – forcing healthy young adults to buy insurance to expand the pool with the elderly and ill – will bring about the desired results.

The Inevitable Growth in Spending on Entitlements:  Finally, by this point in our national political and economic history, do we really need any more evidence that new spending programs nearly always end up costing far more than we were promised at the start?  Reason has a fun two-minute video, which describes some of the gimmicks the Democrats have used to portray the health care legislation as a deficit-reduction measure and highlighting Congress’s poor track record in projecting the actual costs of new health care programs.  The actual expenditures on Medicare in its first quarter century proved to be nearly ten times higher than predicted when the legislation was enacted.

Fantasies About Economic Forecasts

Having allowed this post to become nearly as bloated as President Obama’s budget, I’ll only briefly highlight the further flights of fantasy behind the new health care legislation in the way of rosy economic predictions.  For this new health care spending program to remain under control and for new revenues to come in as anticipated, we must assume that the new legislation has little or no negative effect on the economy.  Without taking into account the impact of the new entitlement program, the CBO optimistically predicts that unemployment will be cut in half by 2014 (which is the same year that many of the health care legislation provisions take effect).

But those sunny economic forecasts are likely to be frustrated with new burdens placed on employers who will now be required to offer health insurance that meets certain guidelines, upward pressures on health insurance premiums that will be created by greater demand and more regulation, and the higher taxes that will be imposed on investments.  The picture isn’t pretty.

As but the first of many such examples to come, President Obama featured Caterpillar Tractor as a model case for the Democrats’ huge economic stimulus package at work, claiming the infusion of federal dollars into the economy would prompt companies like Caterpillar to hire back workers who had been laid-off during the recession.  But now, with President Obama’s health care legislation, Caterpillar estimates the company will have to pay an additional $100 million in insurance premiums, meaning further lay-offs may be around the corner.  “In our fragile economy,” Caterpillar’s vice president wrote to Congress, “we can ill-afford cost increases that place us at a disadvantage versus global competitors that are not similarly burdened.”

As for the assumption that health care costs will fall, even though the bill does next-to-nothing to address that problem (failing to include any tort reform, for example), David Brooks shares my pessimism:

Other nations spend 10 percent or so of their G.D.P. on health care.  We spend 17 percent and are predicted to soon spend 20 percent and then 25 percent.  This legislation was supposed to end that asphyxiating growth, which will crowd out investments in innovation, education and everything else.  It will not.

Keep in mind that President Obama and the Democrats already had quadrupled the federal deficit during their first year in power, even before enacting the new health care spending programs.  The combined effect is likely to prove to be a perpetual budget buster and a permanent heavy thumb of government pressing down on the economic scales.  If we bankrupt our nation (here and here) and cripple economic prosperity, quality health care for the disadvantaged will remain out of reach.  No principle of Catholic social teaching excuses such economic foolishness.

Greg Sisk

[Tomorrow:  The Political Unsustainability of an Unpopular One-Party Scheme]