Why Can’t the Government Forecast Obamacare’s Financial Future?

Source: Thinkstock

Source: Thinkstock

The Congressional Budget Office has played a key role in defining the fiscal success and failures for the Affordable Care Act — at least from the perspective of the American taxpayer. Since the healthcare reform bill was passed in March of 2010, the CBO has provided lawmakers and taxpayers key projections on how the healthcare reform law would impact government spending and the federal deficit — until now. Several weeks ago, the nonpartisan government agency announced that it would no longer measure the fiscal impact of a number of provisions of the healthcare reform law because the task is too complex, partly because of difficult economic recovery, but also because of the numerous rule changes made by the Obama administration throughout the law’s implementation. This announcement means that it will be much more difficult to study the fiscal impacts of the healthcare reform since the CBO analysis is the leading authority on the subject.

Why Is Obamacare’s Financial Future Unknowable?

After considering all Obamacare’s provisions — including those that subsidize insurance coverage for lower-income Americans — the CBO and the Joint Committee on Taxation estimated in July 2012, the most recent comprehensive analysis, that the Affordable Care Act’s overall effect would be to reduce federal deficits. Upon a request from House Republicans, the agency calculated that repealing the Affordable Care Act would add $109 billion to the federal deficit over a ten-year period. That means that two years ago the agency still believed the reform law would save the government money. The CBO’s expectation for a budget reduction was largely reaffirmed in the agency’s April updated estimate of the effects of the insurance coverage provisions of Obamacare. But a footnote in the April analysis noted that, “CBO and JCT can no longer determine exactly how the provisions of the ACA that are not related to the expansion of health insurance coverage have affected their projections of direct spending and revenues.”

More specifically, the CBO can quantify the budgetary effects of provisions of the Affordable Care Act that expanded insurance coverage through the establishment of entirely new programs, like the system of insurance marketplaces, or through the enlargement of existing government programs. “In contrast, other provisions of the Affordable Care Act significantly modified existing federal programs and made changes to the Internal Revenue Code,” and “isolating the incremental effects of those provisions on previously existing programs and revenues four years after enactment of the Affordable Care Act is not possible.” Obamacare’s expansion of Medicaid is just one example of a changed program that the CBO is unable to measure.

Fault is not entirely with the Obama administration’s much-amended implementation schedule; the reform has seen 41 different delays or administrative adjustments — according to the nonprofit health and tax policy organization, Galen Institute. However, as CBO wrote in a letter to Speaker of the House John Boehner in July of 2014, which detailed the possible effects of a repeal of the Affordable Care Act, “separating the incremental effects of the provisions in the ACA that affect spending for ongoing programs and revenue streams becomes more uncertain as the time since enactment grows.” Changes in economic conditions over the past four years, as well as adjustments to the CBO’s projections of future economic conditions, have also made it more difficult to describe the fiscal impacts of the law.

What Are the Implications of the CBO’s Statement?

George Mason University senior research fellow Charles Blahous termed the CBO’s inability to quantify the costs of Obamacare a real problem. “The ACA’s financing provisions were assumed to be effective so as to get a favorable score out of CBO upon enactment, but no one is keeping track of whether they’re being enforced,” Blahous, a public trustee for Social Security and Medicare, said in an interview with Roll Call. “We receive occasional updates on the gross costs of the law, but none on whether the previously projected savings provisions are producing what was originally projected.” As a result, there is “no barrier” to keep the administration from “continually rolling back the financing mechanisms without the effect on the ACA’s finances ever being fully disclosed.” Or, in other words, without the agency’s calculations of Obamacare’s fiscal impact, the administration can make changes to the law without those changes being quantified by the CBO, leaving the American public unaware of the cost.

Furthermore, a number of the Affordable Care Act’s provisions that were meant to create budget savings have yet to do so, as Blahous noted in a policy piece published by the conservative-leaning Manhattan Institute. He argued that the reform’s “finances are unraveling” because a number of its cost-saving provisions remain unenforced or have been delayed, scaled back, suspended, or repealed. His assessment contends that the problem is not that the CBO failed to inform Congress and the American public of its fiscal concerns by including its warning only in a rhetoric-heavy footnote.

How Might Obamacare Impact the United States’ Finances?

After the healthcare reform was first passed into law in 2010, the agency calculated that Obamacare would reduce the United States deficit by $143 billion over a decade, meaning the Affordable Care Act would essentially pay for itself and offer a fiscal bonus. Several months ago, the CBO issued an updated estimate of the effects that the insurance coverage provisions of the Affordable Care Act will have on the United States. That April analysis did not declare the healthcare reform a success, but it showed that the law is not the fiscal disaster some opponents believed it would be.

In the months that the Affordable Care Act was debated in Congress before President Barack Obama signed his signature piece of legislation into law in March 2010, and in the the years the Affordable Care Act was debated across the country before the cornerstone provision of the healthcare reform was implemented in October 2103, the overarching concerned voiced by critics was its cost. In a document entitled “The Case Against Obamacare,” posted to the GOP website in 2011, it claimed that the healthcare reform and its so-called “unconstitutional” individual insurance mandate will drive up healthcare costs, increase insurance premiums, hurt the quality of healthcare, raise taxes, and swell the deficit.

The cornerstone provision of the Affordable Care Act — the individual insurance exchanges set up in all 50 states and Washington D.C. — launched on October 1, and despite the design flaws and software errors that marked the rollout and kept sign-ups low initially, more than 8 million Americans had enrolled by the March 31 deadline, meeting the high-end of the Obama administration’s targeted range. The exchanges system may be operational and the 8-million enrollment hit, a sign that the exchanges are viable, but it is far too soon for health industry experts to conduct a comprehensive analysis of how Obamacare has altered the American healthcare system. However, evidence is emerging that can provide clues on how healthcare costs, insurance premiums, taxes, and the deficit have been affected.

April’s CBO report was a key piece of evidence for analyzing the fiscal impacts of the reform. It showed that lower premium costs would result in lower government expenditures on subsidies. The exchange program that was intended to expand insurance coverage will cost the government $104 billion less over the next decade than projected earlier in the year. Agency calculations forecast that the non-compliance penalties generated by the employer and individual mandates would fall by $18 billion over that ten-year period, but the costs of subsidies would decrease even more. Estimates of the budgetary effects of the ACA’s insurance coverage provisions have changed many times since the legislation was enacted. Year-over-year comparisons of the agency’s estimates of the healthcare reform’s budgetary impact show that the costs of its coverage provisions have decreased over the past four years. “That net downward revision is attributable to many factors, including changes in law, revisions to CBO’s economic projections, judicial decisions, administrative actions, new data, numerous improvements in CBO and JCT’s modeling, and lower projected healthcare costs for both the federal government and the private sector,” noted the April report.

More broadly, the CBO and JCT projected that the provisions of the Affordable Care Act related to health insurance coverage — which includes Medicaid and the Children’s Health Insurance Program, in addition to the insurance marketplace subsidies — will cost the federal government $659 billion between the 2014 and 2019 fiscal years — a 13-percent decrease from the $759 billion initially calculated in March 2010. The CBO’s downward revisions of the cost of the Affordable Care Act’s coverage provision has led the agency to lower its cumulative deficit forecast for 2015 through 2024 fiscal years by $286 billion to $7.62 trillion. The reduced health cost estimates, including the lower-than-expected subsidy expenses — were responsible for a majority of that decrease.

The Obama administration took that lower deficit forecast as good news. “This report demonstrates the Affordable Care Act is working,” then-White House Press Secretary Jay Carney said at a subsequent news briefing. “It shows that marketplace healthcare costs have gone down because premium estimates have gone down.” 

But in the two years that have passed since the CBO made its last complete analysis, the administration has postponed the implementation of several provisions, most notably the employer mandate, and those adjustments have prompted the CBO to lower the revenue the government will raise from the new Obamacare taxes on hospital insurance and manufacturing of drugs and medical devices, and reduce the healthcare savings the law was expected to create. The delay to the employer mandate is expected to cost the government $3 billion in penalty payments in 2016 alone. However, as Paul N. Van de Water — a senior fellow at the liberal-leaning Center on Budget and Policy Priorities and the former assistant director for budget analysis at the agency — told Roll Call, these delays will have little impact on U.S. finances as long as they remain temporary.

Is the U.S. Budget Deficit Going to Increase?

Despite the April 2014 report’s veneer of good Obamacare news, the fact remains that U.S. budget deficits will still increase after 2015, even if budgetary shortfalls will decrease by smaller percentages than shown in earlier CBO projections. “If current laws do not change, the period of shrinking deficits will soon come to an end,” the CBO said in the report. According to the agency, the aging baby boomer generation is at fault. As those born between the late 1940s and mid-1960s retire in greater numbers, more individuals will be drawing federal benefits. Consequently, the CBO expects the costs of mandatory spending programs — like Medicare, Social Security, and Medicaid — will soar, accounting for 11.5 percent of gross domestic product in 2024, up from 2013’s 9.5 percent. By 2024, spending on those programs will cost the government $3.1 trillion and represent more than half of all federal spending. While the federal deficit will reach a low of $469 billion, or 2.6 percent of U.S. gross domestic product in 2015, it will then begin to climb. The CBO expects it will surpass $1 trillion once again in 2023 and 2024 — a level representing around 4 percent of GDP.

Meanwhile, the gross costs of subsidies and other governmental spending on insurance obtained through the exchanges, Medicaid, the Children’s Health Insurance Program, plus the tax credits for small employers will rise to $1.839 trillion between 2015 and 2024. By comparison, in 2010, the CBO projected the gross costs to the federal government would amount to $1.390 trillion.

As the April report makes clear, the Affordable Care Act, and government healthcare programs in general, will greatly balloon the budget in coming years. So it is a problem that all the Congressional Budget Office, or any other source, can no longer quantify the full impact of the healthcare reform on the U.S. budget deficit. As Blahous wrote in his analysis for the Manhattan Institute: “Truly measuring the ACA’s net effect would require us to know exactly how much would have been spent/collected if the ACA had not been passed. This is not precisely knowable. Had the ACA not existed, CMS would have established different program rules and payment rates, and no one knows exactly what those would have been. Nor can we know for certain how much health service consumption and costs would have grown in a world without the ACA.” Even measuring the budgetary impacts of a proposal to repeal Obamacare cannot shed light on those effects because a repeal is not simply the opposite “of the budgetary effects of the ACA itself,” as CBO Director Doug Elmendorf wrote in a June blog post that explained why the CBO will no longer measure Obamacare’s fiscal impact.

“A retrospective analysis of the effects of a current law is very different from a cost estimate for proposed legislation, particularly because it requires formulation of a counterfactual benchmark representing what would have happened if the law had not been enacted — a challenging undertaking that is beyond the scope of CBO’s usual analyses,” he wrote. “Therefore, CBO and JCT cannot readily provide a retrospective analysis of the ACA that is analogous to the cost estimate provided by the agencies in 2010. That problem is not unique to the ACA but is common to most legislation that affects preexisting federal programs.”

Could the CBO Be Wrong?

But some healthcare experts are surprised that the CBO can no longer estimate the impact of the Affordable Care Act. “The reality is that they were able to do it a year and a half ago or two years ago, so you have to wonder what changed?” asked Joseph Antos, an expert on healthcare at the right-leaning American Enterprise Institute, in an interview with Roll Call. Antos also acted as a former assistant director for health and human resources at CBO, and until last year, he served as a member of the agency’s Panel of Health Advisers. “They don’t want to admit that what they assumed two years ago is no longer correct because the administration has not implemented many provisions of the law,” he added.

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