A Comment on a Study by Charles Blahous on the Affordable Care Act’s Fiscal Consequences

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 His study, though, has been used and will continue to be used to argue that the Affordable Care Act (“ACA”) should be repealed as fiscally irresponsible.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.