CBO, CLASS, and Obamacare’s Fiscal Sustainability
Since the demise of CLASS, analysts on both sides of the political spectrum have weighed in on whether and how the fiscal disaster that is the CLASS Act has broader implications for Obamacare’s sustainability. For instance, last week liberal blogger (and Obamacare apologist) Ezra Klein said the motto is “trust CBO,” and that because CBO says the law will reduce the deficit, it will. (Of course, CBO also said last year that CLASS would reduce the deficit in its first ten years, so that may not mean much.)
Before looking at the granular details, it’s first worth comparing CLASS to Obamacare at a macro level. The HHS report on CLASS contains the word “uncertain” no fewer than 16 times in a 50-page document – it discusses “inherently uncertain” CLASS modeling, the “great uncertainty around the existing estimates,” and a “very high level of uncertainty around assumptions in the actuarial models.” Likewise, CBO in its score of Obamacare said that “the range of uncertainty” surrounding estimates of the budgetary impact of the legislation “is quite wide.” CBO’s most extensive analysis of Obamacare’s long-term projections – in last year’s long-term budget outlook – included a whole section regarding uncertainty and sustainability, which I’ve pasted below. The sum total of the passage would lead one to believe that the uncertainty surrounding implementation of the rest of the law is nearly as great as that surrounding CLASS.
To examine it more closely: The Administration now claims that since CLASS’ demise, Obamacare will reduce the deficit by an estimated $124 billion over the next ten years. What does that mean? If…
- Medicare provider payment reductions that will take Medicare rates below Medicaid payment levels – and cause up to 40 percent of providers to become unprofitable – are implemented as scheduled; AND
- Medicare Advantage cuts that the Administration already felt the need to mitigate in the short-term for political reasons can be implemented, causing millions of seniors to lose their current coverage; AND
- Someone finds a spare $370 billion to avert a 30 percent reduction in Medicare physician payment fees scheduled to take effect this coming January; AND
- A future Administration is willing to implement a 40 percent tax on insurance policies so unpopular unions forced its delay until 2018, well after President Obama will have left office; AND
- Democrats are willing to allow a new “high-income” tax not indexed to inflation to become the “new AMT,” hitting more and more middle-class families until nearly 80 percent are being hit with this surcharge; AND
- A scheduled reduction in insurance subsidies in 2019 goes through, despite liberal advocates already calling for the subsidies to be increased; AND
- Employers do not drop coverage en masse, despite the numerous studies, papers, briefs, reports, employer questionnaires, consultant presentations, surveys, op-eds, interviews, and quotes suggesting that employers will drop coverage in much higher numbers than CBO first anticipated…
Then the Administration will have reduced the deficit by about $12 billion a year for the next decade – or less than 1% of the whopping $1.3 trillion deficit the federal government ran over the past 12 months. In other words, at best the law will “reduce” the deficit by an amount so small some may consider it microscopic. And, as illustrated above, the number of assumptions needed to arrive at that conclusion may be so great as to beggar belief – just as the Medicare actuary knew from Day One that CLASS wouldn’t work, despite all the Administration’s rhetoric. Their claims notwithstanding, I haven’t seen Ezra Klein or other Obamacare advocates willing to make actual wagers that the law will actually end up reducing the deficit – and given what’s needed to make that prediction come true, with good reason.
Questions About Sustainability
One challenge that arises in projecting federal outlays for health care over the long term is that the recent legislation either left in place or put into effect a number of procedures that may be difficult to sustain over a long period. For example, the legislation did not alter the sustainable growth rate mechanism used for determining updates to Medicare’s payment rates for physicians; under that mechanism, those rates are scheduled to be reduced by about 21 percent in 2010 and then decline further in subsequent years. Since that mechanism was enacted in 1997, its provisions have usually been modified to avoid scheduled reductions in payment rates, and legislation was just enacted to delay cuts in those payment rates until December 2010 (a development that is not reflected in the projections). At the same time, the legislation includes provisions that will constrain payment rates for other providers of Medicare’s services. In particular, increases in payment rates for many providers will be held below the rate of increase in the average cost of providers’ inputs.
Taking all the provisions of the legislation together, CBO expects that, adjusted for inflation, Medicare spending per beneficiary will increase at an average annual rate of less than 2 percent during the next two decades—compared with a roughly 4 percent annual growth rate during the past two decades (a calculation that excludes the effect of establishing the Medicare prescription drug benefit). It is unclear whether that lower rate of growth can be sustained and, if so, whether it will be accomplished through greater efficiencies in the delivery of health care or will instead reduce access to care or diminish the quality of care (relative to the situation under prior law).
Another provision that may be difficult to sustain will slow the growth of federal subsidies for health insurance purchased through the insurance exchanges. For enrollees who receive subsidies, the amount they will have to pay depends primarily on a formula that determines what share of their income they have to contribute to enroll in a relatively low-cost plan (with the subsidy covering the difference between that contribution and the total premium for that plan). Initially, the percentages of income that enrollees must pay are indexed so that the subsidies will cover roughly the same share of the total premium over time. After 2018, however, an additional indexing factor will probably apply; if so, the shares of income that enrollees have to pay will increase more rapidly, and the shares of the premium that the subsidies cover will decline.