Extreme Budget Illogic At the CBO

By Diana Furchtgott-Roth

WASHINGTON--Hold onto your budget scorecards. With the House of Representatives likely to vote next week on H.R. 2, Repealing the Job-Killing Health Care Law Act, the Congressional Budget Office has announced that eliminating this 2010 Democratic entitlement program for 32 million uninsured people will cause the deficit to increase by $230 billion over the next decade.

With such logic, we could cut the deficit by passing a new entitlement program. Indeed, we could solve the whole budget problem by passing new entitlement programs every day of the year.

It doesn't take an economist to know that this line of argument makes no sense, for a simple reason: when the health-care bill was being debated in the last Congress, the CBO-the official scorekeeper of all bills-came up with an absurd finding that it would reduce future budget deficits. Just as that projection lacked credibility, so does the converse, that repeal would expand future deficits.

Here's how CBO reasoned last week. In a letter to Speaker John Boehner, CBO director Douglas Elmendorf explained that the 2010 health-care act included provisions to reduce federal spending, primarily for Medicare, and increase revenues, by raising the Medicare payroll tax and taxing insurers, pharmaceutical companies, and medical device manufacturers.

These savings and tax increases would help pay, through subsidy of premiums, for the 32 million uninsured Americans to have access to health care, many with government-subsidized premiums, through the insurance exchanges to be set up in each state.

If the act were repealed, Elmendorf wrote, "such reductions in spending and increases in revenues would not occur," and federal deficits would increase over the next decade.

The problem is that the projected savings and the tax revenues in all likelihood will not occur if the act stays on the books as it reads now. Few believe that that Congress will cut $500 billion from Medicare outlays over the next decade and apply the funds to tax credits to help the uninsured buy an expensive government-mandated health plan.

There is history to support this skepticism. Just last year, Congress was scheduled to cut physician reimbursement rates for Medicare by 21% in June. The cuts were postponed until November, and in December Congress voted to delay a 25% cut until the end of 2011.

Now, the 25% cut is due to take effect in January 2012, to be followed by a further cut in 2014. This scaling back of physicians' reimbursements would save the government $65 billion over the next three and a half years--$65 billion to be dedicated to the new health care entitlement. Congress has repeatedly delayed these cuts because of a well-founded fear that they would lead to more doctors refusing to see Medicare patients.

The federal health-care program will also have greater expenses than projected, as employers drop health coverage and their employees are forced to buy government-subsidized policies. Many companies, such as AT&T and Caterpillar, have calculated that, come 2014, it will be less expensive to stop offering insurance and pay the penalty of $2,000 per worker, and some will undoubtedly do so. Each additional person with government-subsidized premiums will raise costs to the taxpayers.

To be fair to Elmendorf, he can calculate only the budget effects of bills he is given. Garbage in, garbage out, as they say. He has stated clearly that his revenue effects rely on the provisions of the legislation remaining unchanged over the next two decades, which, he says, rarely happens.

Former CBO directors are not held to such constraints, and Douglas Holtz-Eakin, Elmendorf's predecessor, addressed the validity of the revenue estimates in an article in Health Affairs last summer. He concluded that the new law, rather than reducing the deficit by $124 billion over the next ten years as CBO forecast, would increase it by more than $500 billion and by $1.5 trillion in the decade afterwards.

As well as the problems with Medicare savings, Holtz-Eakin wrote that the excise tax on expensive plans, due to take effect in 2018, will not be politically possible, costing the Treasury $78 billion over the next decade and $400 billion the following decade. That is, Congress will back away from the tax, just as it delayed its effective date from 2013 to 2018 after fierce objections from unions.

Holtz-Eakin's view that the health care act will increase the deficit is shared by the chief actuary of the Center for Medicare and Medicaid Services, Richard Foster. In a memo published last April, Foster estimated that the net cost of the health care bill-the sum it would add to the deficit--was $250 billion over the years 2010 to 2019.

CBO calculates costs to the government, not individuals. It hasn't even computed the increased cost of health insurance to enrollees as younger, healthy Americans choose to pay the fine of $695 or 2.5% of taxable income in 2016 (whichever is less) and legally opt out of insurance.

Since insurance companies will have to cover all applicants, regardless of health or preexisting conditions, some people will figure, why not wait to buy insurance until I need it? Companies will find themselves insuring a sicker population, and will have to raise rates, taking a bigger chunk of some people's paychecks and driving others to pay the fine.

In addition, CBO doesn't capture the effects of the lost jobs stemming from the new health care law. It imposes a penalty of $2,000 per worker a year on firms with 51 or more employees (with an exclusion for the first 30) which don't offer the right kind of health insurance. Some firms won't expand their payrolls above 50, and others will shed workers until they reach 50, or will spin off a separate employment unit.

When assumptions are broadened to include more realistic scenarios, it's clear that, despite the CBO calculations, the health care law is a costly entitlement that America cannot afford. Repealing the law would shrink the deficit, not increase it.

Diana Furchtgott-Roth is a contributing editor of RealClearMarkets, an adjunct fellow at the Manhattan Institute, and a columnist for the Examiner.

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