Obamacare’s Rose-Colored Short-Sighted Vision

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.


Source: Author’s calculations from CBO’s March 2010 estimate (Table 4) and January 2015 estimate (Table B-1)

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.

Comments (11)

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  1. Al Baun says:

    Do you have any new figures reflecting goverment cost increases if the ACA were repealed? The last CBO report to Boehner (2012) was something along the lines of $120 Billion in additional costs if the ACA were repealed. Figures? Thoughts?

    • dennisbyron says:

      It is well documented — particularly by Medicare’s actuaries — that all these numbers are bogus. In particular, they said you could not “save Medicare” $500 billion (depends on what 10-year timeframe you are talking about) on one hand (that is, keep it in the Medicare trust funds) and also spend it on PPACA at the same time. The same observation works in reverse. Money you were never going to “save” in the first place cannot all of a sudden raise the national debt.

      • John R. Graham says:

        Thank you. I wonder if it is worth my time to do these analyses. Sometimes, I am tempted not to, but the media and public keep paying attention!

        The biggest problem is the Medicare physician pay formula, the Sustainable Growth Rate.

  2. Al Baun says:

    Corrections: [if the ACA ‘was’ repealed] and [$120 Billion in addidtinal ‘deficit’].

    • Wes Baker says:

      I am glad to see this being brought up. The discourse around repealing the ACA often excludes this elephant in the treasury.

  3. Don Levit says:

    The Medicare trust funds that were set aside for future expenses were spent on other government expenses
    While the trust funds show balanced from a cash perspective the funds are empty
    The trust fund perspective the funds are full
    The trust fund perspective extends to Part D
    It is fully funded even though no prior taxes were set aside as in the other Medicare trust funds
    I guess cash flow deficits are immaterial to the federal government
    Don Levit

    • Al Baun says:

      Deficit spending, though now commonplace in both our private and public sectors, is very much material. Your comment leaves me to believe that you want the ACA gone despite the potential impact on the budget. Isn’t ‘The Deficit’ still one of the battle cries of the right or is it now passé since the deficit is dropping rapidly under the current administration?

      With respect to the ‘Empty Coffer’ argument, yes, the Medicare/Medicaid and Social Security Trust Fund piggy banks are empty but full of IOUs. I have little money in my wallet but I have a lot of IOUs from banks and brokerages borrowing my money. Unless one takes the position of burying these funds in the back yard it only makes fiscal sense to invest the funds to make interest, and one of the biggest borrowers of these funds is Uncle Sam … to spend on “government expenses.

      I would suggest that until congress can raise taxes or find a way to address the remaining deficit, they should hold the ACA dear.

  4. Don Levit says:

    The banks and brokerages that wit you money are entities distinct from each other and distinct from you
    That distinction actually provides organic economic growth
    In contrast the same entity that borrowed money from the trust funds owes money to itself
    If you borrowed money from yourself would that be organic growth?
    Don Levit

    • John R. Graham says:

      Thank you. The U.S. government is quickly becoming a health insurer with a military attached to it. Sometimes I describe the so-called trust funds as following: If Aetna or Cigna bought Boeing or Northrop Grumman, and Aetna or Cigna transferred its operating capital to their new defense subsidiaries, they would have to raise more money to finance their insurance business.

      A government bond issued by one government office (Treasury) and held by another government office (Medicare Trust Fund) is not a serious financing transaction.

  5. wanda jones says:

    John and Friends, if you think that this is a light quedstion or a transient one, it is one of the foundational myths that allowed the ACA to pass in the first place–the illusions that filled it. The galloping ignorance of people in Washington is just appalling. There is no accrual accounting, only “funds” which ebb and flow like tide pools without reference to the other pools.

    The whole relationship with states is also flawed. To me, if the foundational economics of this country are not addressed, it is d….hard to craft a new health policy.

    Another thing I’d like to see developed further is the illusion that these subsidies are a gift to the enrollee…No, they are a gift to the health plans. The enrollee is just an excuse to send billions to political supporters. Suppose there were an amendment to the ACA whereby there where no susbsidies, just pre-paid policies with the money going directly to insurers, who would have the responsibility of accepting X Nr of enrollees. People would scream. But I scream at the hypocracy of all these players that this program is all about the poor.

    I also gag at the continual sniping about how provider concentration is raising costs. What about health plan consolidations? I once did a great chart showing the pendulum of plan concentration followed next by provider mergers, then back and forth to the point that California is now: 7 large plans and 7 large provider organizations. This is a case study–book to figure out what is actually at work here. Poor public–too many of them think this is a dandy law without a downside.


    Wanda Jones

  6. Don Levit says:

    Interesting analogy about lower premiums paying for the cost each year
    These subsidies never touch the hands of individuals
    They go directly to insurers
    That which is subsidized provides short term relief but exacerbates long term costs
    This is because subsidies suddenly satisfy unmet demand
    With incomes staying constant and demand increasing prices for that good or service will rise even faster
    Subsidies are needed but in a different form
    Why not subsidize the employer by sharing his risk – lowering his risk substantially over time and lowering premiums
    National Prosperity Life and Health is offering relief to to employers today
    To learn why TPAs and brokers across the country are getting a new lease on life go to nationalprosperity.com
    Don Levit,CLU,ChFC