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Fiscal Diagnosis Only Gets Tougher for Health Care Law

By Paul M. Krawzak, CQ Roll Call

June 4, 2014 -- For Democratic lawmakers who were hesitant to sign onto the sweeping 2010 health care law, one of the most powerful selling points was that the Affordable Care Act (ACA) would actually reduce the federal budget deficit, despite the additional costs of extending health insurance coverage to the uninsured.

Four years after enactment of what is widely viewed as President Barack Obama's key legislative achievement, however, it's unclear whether the health care law is still on track to reduce the deficit or whether it may actually end up adding to the federal debt. In fact, the answer to that question has become something of a mystery.

In its latest report on the law, the Congressional Budget Office (CBO) said it is no longer possible to assess the overall fiscal impact of the law. That conclusion came as a surprise to some fiscal experts in Washington and is drawing concern. And without a clear picture of the law's overall financing, it could make it politically easier to continue delaying pieces of it, including revenue raisers, because any resulting cost increases might be hidden.

Charles Blahous, a senior research fellow at George Mason University's free market-oriented Mercatus Center, calls the CBO's inability to estimate the net effect of the law "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," says Blahous, a public trustee for Social Security and Medicare. "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, Blahous says, "there's no barrier to continually rolling back the financing mechanisms without the effect on the ACA's finances ever being fully disclosed."

When Congress passed the health care law in 2010, the CBO estimated it would reduce the deficit by more than $120 billion over a decade, compared to the agency's current-law baseline projection of spending, revenue and the deficit. That meant the health care law would, in effect, pay for itself and deliver an additional fiscal bonus.

The CBO based its estimate on the assumption that the law, which included hundreds of billions of dollars' worth of Medicare cuts and tax increases to pay for health care subsidies, would be implemented as written. Now, after a chaotic start and a series of delays or adjustments in various provisions of the act, including an employer mandate that was expected to bring in new tax revenue, it's unclear to what extent those promised savings are being realized.

In a little-noticed footnote to a report issued in April, "Updated Estimates of the Effects of the Insurance Coverage Provisions of the Affordable Care Act," the CBO wrote that it and the Joint Committee on Taxation "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."

The CBO nevertheless maintained in the report that, based on an earlier analysis in 2012, apart from the insurance provisions in the law, "many other provisions, on net, are expected to reduce budget deficits." Still, that analysis is effectively a ballpark figure since the CBO did not include a precise estimate of the law's overall budgetary impact.

Joseph Antos, an expert on health care at the right-leaning American Enterprise Institute, says he too is surprised by the CBO's statement that it can no longer estimate the impact of the health care law.

"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?" says Antos, a former assistant director for health and human resources at CBO and until last year 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."

But Dan Mendelson, who runs Avalere Health, a consulting company, says that after a number of years, it's always hard to track the fiscal effects of a law.

"It becomes very difficult in a fiscally valid way to assess the impact of legislation because so many other things change at the same time," says Mendelson, who served as associate director for health at the Office of Management and Budget during the Clinton administration. "It gets hard to isolate the effects."

Mendelson adds that "at a certain point it becomes irrelevant because it's all part of the baseline of expenditures. It's current law. And if somebody wants to repeal some portion of that law, then you can assess in a targeted way what that would cost or what the spending impact would be."

The CBO did say that one element of the law's fiscal impact is relatively clear: its changes to insurance coverage.

In its April report, the CBO updated its estimates of the budgetary effects of the health insurance coverage provisions of the law, including insurance subsidies, the Medicaid expansion, penalties paid by employers and individuals for not providing or purchasing insurance, and the excise tax on high-premium insurance plans.

Compared with its February 2014 baseline, the CBO said payments of penalties generated by the employer and individual mandates were projected to fall by $18 billion over a 10-year period. Still, because the cost of subsidies and related spending was estimated to fall even more, the agency said the insurance provisions would cost $104 billion less over the 10-year period than projected two months before.

Beyond insurance changes, though, the deficit effects of the law are much harder to analyze.

While CBO can isolate and reassess the provisions of the ACA that expanded insurance coverage, it cannot perform the same analysis on the portions of the law that modified existing federal programs and made changes to the tax code. "Isolating the incremental effects of those provisions on previously existing programs and revenue four years after enactment of ACA is not possible," the CBO said.

In its original score of the law in March 2010, the CBO said the insurance provisions would cost $788 billion between 2010 and 2019. But that cost would be more than offset by $511 billion in spending cuts, primarily to Medicare, and $420 billion in new revenue, much of it generated by new taxes on hospital insurance and manufacturers of drugs and medical devices. As a result, the CBO estimated at the time, the health care law would reduce the deficit by $143 billion over 10 years, compared to the agency's current law baseline. The vast majority of the savings—$124 billion—was supposed to come from the health care portion of the law, but another $19 billion would be derived from changes to student loans and grants.

The last time the CBO produced an estimate based on the entire law was in 2012, when the agency said that a GOP proposal to repeal the law would add $109 billion to the deficit over a 10-year period. That implies the CBO still thought two years ago that the law would save money.

Since then, the administration has made numerous adjustments to the implementation of the law, reducing the revenue it was supposed to raise or savings it was expected to achieve. Last year, for example, the IRS delayed the employer mandate until 2015 from 2014. And earlier this year, the agency extended the delay for another year for certain employers. In its April report, CBO estimated the delay in the employer mandate would cost the government $3 billion in penalty payments in 2016.

The health care law also mandated cuts to Medicare, but the savings related to the Medicare Advantage program have been somewhat reduced by an administration pilot project that boosted bonus payments to Medicare Advantage plans since 2011.

In 2010, the CBO projected the health care law would cut Medicare as well as some Medicaid and related spending by $455 billion between 2010 and 2019.

But in a letter to House Speaker John A. Boehner in 2012, the CBO provided an updated estimate that suggested those savings may be increasing. According to that letter, repealing the law would increase Medicare and related spending by $741 billion from 2013 to 2022, which implies that keeping the law on the books would save the same amount.

Paul N. Van de Water, a senior fellow at the left leaning Center on Budget and Policy Priorities and former assistant director for budget analysis at the CBO, argues the adjustments in the law will have little fiscal impact as long as they remain temporary.

"I don't think that any of the delays that you're talking about are likely to turn the law from one that reduces the deficit into one that increases it," he says. Van de Water argues that the specific Medicare cuts in the ACA are being implemented. Two of the key tax increases in the law took effect last year, he added—a 0.9 percent increase in Medicare payroll tax rate, and a 3.8 percent tax on dividends and interest, both for upper income brackets. "My strong instinct is that all of these changes are going to leave the basic financial impact picture of the law much the same," he says.

But to Blahous, the delays stoke doubts about the viability of other cost-saving measures in the law that have yet to be implemented and may be more painful and politically challenging. "The question is, if things haven't been enforced to date, is it really a valid assumption to assume they will be fully enforced going forward?" he says. "You have this sort of invisible undoing of the financing of the ACA. But it doesn't appear anywhere in the scorekeeping, because we assume it's not going to happen in the future, and we're not keeping track of it happening in the past."

If the employer mandate were repealed rather than just delayed, for example, it would cost the government an estimated $106 billion in lost revenue between 2013 and 2022, the CBO said in 2012.

Blahous notes the delays are not surprising, since the law was pushed through Congress with little Republican input or support.

"This is what happens when a vast new spending program is passed on a partisan basis," Blahous says. "Those who opposed the law have no stake in enforcing the provisions required to finance it. Those who enacted the ACA don't want sole political ownership of its tax increases, penalties and Medicare spending cuts, so they scale them back."

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