A similar version of this Health Alert appeared at Forbes.
Last summer, my colleague Devon Herrick accused the Centers for Medicare & Medicaid Services of looking at Medicare’s solvency through rose-colored glasses. Well, CMS has passed those shiny spectacles to another government agency.
In the January 2015 Budget and Economic Outlook, the Congressional Budget Office (CBO) has pronounced that Obamacare’s future costs will be seven percent less than were projected in April 2014. Looking even further back in the rear-view mirror, the CBO itself has an even more exciting story to tell:
In March 2010, CBO and JCT projected that the provisions of the ACA related to health insurance coverage would cost the federal government $710 billion during fiscal years 2015 through 2019 (the last year of the 10-year projection period used in that estimate). The newest projections indicate that those provisions will cost $571 billion over that same period, a reduction of 20 percent (p. 129).
Table 1 decomposes this $139 billion of reduced costs over the five-year period. It shows that $5 billion are due to higher tax receipts than originally projected, while $134 billion are due to reduced costs.
However, over half of those reduced costs are due to Medicaid, and the CBO’s explanation of this is opaque. Obamacare originally asserted the power to command states to increase Medicaid dependency. Medicaid is jointly funded by the federal and state governments, and many states did not want to incur the costs of expansion. The Supreme Court supported that choice by overturning the Administration’s mandate. Previous CBO projections have taken this into account. However, the January 2015 projection restores the original March 2010 estimate of the number of people added to Medicaid as a result of Obamacare. In other words, CBO appears to project that every state will expand Obamacare soon.
Medicaid savings in the January 2015 projection are due to 10 percent to 15 percent reductions in costs per beneficiary. The same holds for the $51 billion of savings due to lower subsidies to health insurers in Obamacare exchanges. CBO notes that cost increases in private and government health plans have been significantly slower than anticipated in previous years, and assumes this will continue. Nobody can fully explain the slower rate of health spending in recent years, but consumer-driven health plans and the Great Recession explain much of it.
This challenges CBO’s long-term projections: CBO now projects real (inflation-adjusted) growth in Gross Domestic Product (GDP) of over two percent per annum though 2025, so it appears imprudent to expect health spending to continue to increase at a recessionary pace.
Another challenge to the low projected subsidies in the Obamacare exchanges is the CBO’s estimate of how many exchange plan enrollees will receive subsidies. CBO projects that 75 percent of enrollees will receive subsidies in 2015 and 71 percent in 2025 (p. 122). However, 87 percent received subsidies in 2014.
When we look beyond 2019, Obamacare’s spending explodes again. CBO projects the average exchange subsidy per covered enrollee in 2015 will be $4,330 and increase to $7,710 in 2025, an increase of 78 percent in nominal terms (p. 122). In real, inflation-adjusted terms it is an increase of 48 percent (using the CBO’s estimate of future Consumer Price Inflation).
And 2025 is only ten years in the future! We have had Medicare for fifty years. Don’t let the CBO’s rose-colored short-sighted vision lull us into complacency: Obamacare is a long-term spending disaster.