A
tactic commonly used in making policy arguments in Washington is to refer to
“studies” that support, or purportedly support, whatever policy one is advocating. If the policy rationale is either
controversial or weakly supported, then, the longer or more technical the
study, the better, because then not many people will read it.
During
my career in government, I had occasion, thankfully not often, to review some such
“studies.” Some, though not all, were of
poor quality, but they served a political purpose. Very few policymakers are going to read a
study that can only be contained within one or more large binders and is
mind-numbingly boring or unreadable, but that there is a study can be used to
add weight to a policy argument.
Of
course, not all policy studies are bad, and I mention this in connection with
Charles Blahous’ study, “The
Fiscal Consequences of the Affordable Care Act,” not because it is overly long
(about 50 pages) nor so technical as to be unreadable. In fact, it is clear that the author, who was
Deputy Director of the National Economic Council in the George W. Bush
Administration and was appointed by the Obama Administration as a public
trustee of the Medicare and Social Security trust funds, is highly
knowledgeable about government health care programs and has spent considerable
effort in studying the budget implications of the Affordable Care Act. His study, though, has been used and will
continue to be used to argue that the Affordable Care Act (“ACA”) should be
repealed as fiscally irresponsible.
The
Congressional Budget Office has projected that the ACA will in fact reduce the
budget deficit, given that it provides for cost savings and revenue increases
which more than offset its expenditures. Blahous argues that the CBO is wrong not
because it has miscalculated something but because it compares the budgetary
effects of the ACA with a baseline that assumes that Medicare obligations will
be paid in full even though the trust fund covering these expenditures was
projected not to be able to meet these obligations if the ACA had not been
enacted. The CBO is following a
long-held practice in assuming that Medicare spending will not be reduced, no
matter what current law says. On this key
point, I find Blahous’ arguments unpersuasive.
In
particular, Peter
Orzag is particularly scathing on this point:
“What
Blahous actually did was play a trick. His analysis begins with the observation
that Medicare Part A, which covers hospital inpatient care, is prohibited from
making benefit payments in excess of incoming revenue once its trust fund is
exhausted. He therefore argues that the health reform act is best compared to a
world in which any benefit costs above incoming revenue are simply cut off
after the trust-fund exhaustion date. Then, he argues that since the
health-care reform act extends the life of the trust fund, it allows more
Medicare benefits to be paid in the future. Presto, the law increases the
deficit by raising Medicare benefits.
“Yet
Blahous only partially adopts his own novel approach. When discussing the
nation’s fiscal outlook, he writes of the ‘federal government’s untenable
long-term fiscal outlook under current law.’ But the long-term deficit
projections are so dire primarily because we assume that benefits will continue
to be paid in full even after the Medicare and Social Security trust funds are
exhausted. If no benefits beyond incoming revenue can be paid after the trust
funds are exhausted, then the fiscal outlook really isn’t untenable.”
In
addition, both Paul
Krugman and Jonathan
Chait made similar criticisms of the Blahous study. You can read Blahous’
rebuttal of these criticisms here
and here.
While
Blahous argues that it is inappropriate to make a judgment that Congress will
continue to fund Medicare expenditures, at the end of his study, he makes a
political judgment for some of his scenarios that Congress will change certain
taxes (the “Cadillac-plan tax” and the “unearned income Medicare contribution”)
so that they bring in less revenue than currently projected. He may be right about this, but why is he
then not willing to assume that, if there were no ACA, Medicare obligations would
be met in full? There is a bit of an
inconsistency here -- adhering to the letter of the law in one case and making
a political judgment in another.
In
addition, Blahous appears to criticize proponents of the ACA for arguing both
that the savings in Medicare spending extend the life of the Medicare Hospital
Insurance Trust Fund and that these savings reduce the deficit. His prose is hedged enough that it is not
clear, at least to me, whether he fully accepts this double-counting argument,
though the Mercatus Center at George Mason University, the institution for
which he wrote the study has posted a video
which makes this argument explicitly and which he appears to endorse.
The
problem with the double-counting argument is that it confuses two different
ways of looking at government trust funds. When people speak about the
government deficit, they are usually referring to the unified budget deficit,
which ignores one part of the government borrowing from another. While there are some accounting subtleties,
the unified budget deficit is in general the difference between government
revenue, whatever their label (e.g.,
fees, income taxes, or Social Security and Medicare taxes), and government expenditures,
whether those expenditures are met from the general fund or from trust funds. The
unified budget deficit is what the government needs to finance from sources
outside of the government. One can also look at what is sometimes called the
federal funds deficit, which does not include the trust funds; however, when
attempting to analyze the effect of the government deficit on the economy, the
unified budget deficit is the correct measure.
If
one analyzes the solvency of the trust funds, then one needs to project the revenue
coming in, the expenditures going out, and the investment return on the
investments of the funds (usually non-marketable Treasury securities, the
interest on which is paid out of the general fund). The solvency of the funds
is important if there is no legislative authority to meet the obligations of
the programs they fund out of the general fund.
If they are projected to run out of money, Congress is on notice that it
will have to do something – lower expenditures, raise the taxes that go into
the trust fund, or meet any shortfall out of the general fund.
In
other words, there is no double counting.
It is just two ways of looking at the trust funds for different
analytical purposes. The argument that Blahous is making is political. He finds it inappropriate to use trust fund
savings to fund or offset the expenditures of another program. In other words, if the other program increases
the unified budget deficit without taking into account any reduction in trust
fund expenditures, then, in his view, it should not be undertaken. It is undoubtedly true that, if Medicare savings
could be achieved without the expenditure and other provisions of the ACA, the unified
budget deficit would be lower than with the ACA expenditures. That does not
mean any budget sleight of hand is going on here.
From
all this accounting arcana, Blahous draws a sweeping conclusion: “Prudent
legislating requires that no policies be implemented that further increase the
government’s commitment to health care financing, at least until it is certain
that existing commitments can be honored without either subjecting future generations
to onerous levels of taxation or uncontrolled growth of the public debt. The
ACA fails this standard by a wide margin, likely increasing federal health care
outlays by well over $1 trillion over the next decade alone. It thus does not constitute effective health
care reform.”
This
conclusion is both too broad and too narrow.
It is too broad in the sense that a technical argument over baselines
should not be used as a reason for determining government health policy. It is too narrow in the sense that what
matters when it comes to health care is not just federal expenditures but the
total amount of U.S. GDP devoted to health care. As has often been remarked, the U.S. spends
more as a percentage of its GDP than other developed countries, while achieving
worse public health results and not providing universal health insurance
coverage. Both liberals and
conservatives should agree that this is a problem that needs to be
addressed. The ACA is a start to
addressing these problems, but more needs to be done to contain health care
costs. For example, administrative costs
are way too high, and the U.S. should not have to bear the lion’s share of the
cost of research and development for new prescription drugs.
The
Blahous study will be used as an argument for repealing most of the ACA. What is galling is that those using the
Blahous study will probably not be aware of why it differs from the CBO
estimates and will probably not have read it.
In the political world, that often does not matter. After all, they will say, we have a study
that proves us right.Update (11/1/2012): In an email, Charles Blahous points me to two links (here and here) where he responds to his critics and writes on his views on what baselines CBO should use. The two articles are interesting, though they do not change my view that the case that the ACA is fiscally irresponsible has not been made. In particular, Blahous does not effectively refute Peter Orzag's criticism quoted above. Those who want to repeal the ACA will use his study as an argument, but they do not address the need to reform health care in the U.S. so that we achieve better health care results with lower expenditures, both public and private.
