Tag Archives: Kent Conrad

Will the “Byrd Bath” Turn Into a Tax Credit Bloodbath?

While most of official Washington waits for word—expected early this week—from the Congressional Budget Office (CBO) about the fiscal effects of House Republicans’ “repeal-and-replace” legislation, another, equally critical debate is taking place within the corridors of the Capitol. Arcane arguments behind closed doors about the nuances of parliamentary procedure will do much to determine the bill’s fate in the Senate—and could lead to a final product vastly altered compared to its current form.

In recent days, House leaders have made numerous comments highlighting the procedural limitations of the budget reconciliation process in the Senate. However, those statements do not necessarily mean that the legislation released last week comports with all of those Senate strictures. Indeed, my conversations with more than half a dozen current and former senior Senate staff, all of whom have long expertise in the minutiae of Senate rules and procedure, have revealed at least four significant procedural issues—one regarding abortion, two regarding immigration, and one regarding a structural “firewall”—surrounding the bill’s tax credit regime.

Those and other procedural questions explain why, according to my sources, Senate staff will spend the coming week determining whether they will need to write an entirely new bill to substitute for the House’s proposed language. The stakes involved are high: Guidance from the parliamentarian suggesting that the House bill contains fatal procedural flaws, meaning it does not qualify as a reconciliation bill, could force the House to repeat the process, starting again with a new, “clean” reconciliation measure.

It is far too premature to claim that any of these potential flaws will necessarily be fatal. The Senate parliamentarian’s guidance to senators depends on textual analysis—of the bill’s specific wording, the underlying statutes to which it refers, and the CBO scores (not yet available)—and arguments about precedent made by both parties. Senate staff could re-draft portions of the House bill to make it pass procedural muster, or make arguments to preserve the existing language that the parliamentarian accepts as consistent with Senate precedents. Nevertheless, if the parliamentarian validates even one of the four potential procedural problems, Republicans could end up with a tax credit regime that is politically unsustainable, or whose costs escalate appreciably.

In 2009, Democratic Senator Kent Conrad famously opined that passing health care legislation through budget reconciliation would make the bill look like “Swiss cheese.” (While Democrats did not pass Obamacare through reconciliation, they did use the reconciliation process to “fix” the bill that cleared the Senate on Christmas Eve 2009.) In reality, it’s much easier to repeal provisions of a budgetary nature—like Obamacare’s taxes, entitlements, and even its major regulations—through reconciliation than to create a new replacement regime. The coming week may provide firsthand proof of Conrad’s 2009 axiom.

“Byrd Rule” and Abortion

The Senate’s so-called “Byrd rule” governing debate on budget reconciliation rules—named after former Senate Majority Leader and procedural guru Robert Byrd (D-WV)— in fact consists of not one rule, but six. The six points of order (codified here) seek to keep extraneous material out of the expedited reconciliation process, preserving the Senate tradition of unlimited debate, subject to the usual 60-vote margin to break a filibuster.

The Byrd rule’s most famous test states that “a provision shall be considered extraneous if it produces changes in outlays or revenues which are merely incidental to the non-budgetary components of the legislation.” If the section in question primarily makes a policy change, and has a minimal budgetary impact, it remains in the bill only if 60 senators (the usual margin necessary to break a filibuster) agree to waive the Byrd point of order.

One example of this test may apply to the House bill’s tax credits: “Hyde amendment” language preventing the credits from funding plans that cover abortion. Such language protecting taxpayer funding of abortion coverage occurs several places throughout the bill, including at the top of page 25 of the Ways and Means title.

Over multiple decades, and numerous parliamentarians, Republican efforts to enact Hyde amendment protections through budget reconciliation have all failed. It is possible that Republicans could in the next few weeks find new arguments that allow these critical protections to remain in the House bill—but that scenario cannot be viewed as likely.

The question will then occur as to what becomes of both the credit and the Hyde protections. Some within the Administration have argued that the Department of Health and Human Services (HHS) can institute pro-life protections through regulations—but Administration insiders doubt HHS’ authority to do so. Moreover, most pro-life groups publicly denounced President Obama’s March 2010 executive order—which he claimed would prevent taxpayer funding of abortion coverage in Obamacare—as 1) insufficient and 2) subject to change under a future Administration. How would those pro-life groups view a regulatory change by the current Administration any differently?

Immigration

A similarly controversial issue—immigration—brings an even larger set of procedural challenges. Apart from the separate question of whether the current verification provisions in the House bill are sufficiently robust, ANY eligibility verification regime for tax credits faces not one, but two major procedural obstacles in the Senate.

Of the six tests under the Byrd rule, some are more fatal than others. For instance, if the Hyde amendment restrictions outlined above are ruled incidental in nature, then those provisions merely get stricken from the bill unless 60 Senators vote to retain them—a highly improbable scenario in this case.

But two other tests under the Byrd rule—provisions outside a committee’s jurisdiction, and provisions making changes to Title II of the Social Security Act—are fatal not just to that particular provision, but to the entire bill, potentially forcing the process to begin all over again in the House. The eligibility verification regime touches them both.

Page 37 of the Ways and Means title of the bill requires creation of a verification regime for tax credits similar to that created under Sections 1411 and 1412 of Obamacare. As Joint Committee on Taxation Chief of Staff Tom Barthold testified last week during the Ways and Means Committee markup, verifying citizenship requires use of a database held by the Department of Homeland Security’s Bureau of Citizenship and Immigration Services (CIS).

That admission creates a big problem: The tax credit lies within the jurisdiction of the Senate Finance Committee—but CIS lies within the jurisdiction of the Senate Homeland Security and Governmental Affairs Committee. And because the Finance Committee’s portion of the reconciliation bill can affect only programs within the Finance Committee’s jurisdiction, imposing programmatic requirements on CIS to verify citizenship status could exceed the Finance Committee’s scope—potentially jeopardizing the entire bill.

The verification provisions in Sections 1411 and 1412 of Obamacare also require the use of Social Security numbers—triggering another potentially fatal blow to the entire bill. Senate sources report that, during when drafting the original reconciliation bill repealing Obamacare in the fall of 2015, Republicans attempted to repeal the language in Obamacare (Section 1414(a)(2), to be precise) giving the Secretary of HHS authority to collect and use Social Security numbers to establish eligibility. However, because Section 1414(a)(2) of Obamacare amended Title II of the Social Security Act, Republicans ultimately did not repeal this section of Obamacare in the reconciliation bill—because it could have triggered a point of order fatal to the legislation.

If both the points of order against the verification regime are sustained, Congress will have to re-write the bill to create an eligibility verification system that 1) does not rely on the Department of Homeland Security AND 2) does not use Social Security numbers. Doing so would create both political and policy problems. On the political side, the revised verification regime would exacerbate existing concerns that undocumented immigrants may have access to federal tax credits.

But the policy implications of a weaker verification regime might actually be more profound. Weaker verification would likely result in a higher score from CBO and JCT—budget scorekeepers would assume a higher incidence of fraud, raising the credits’ costs. House leaders might then have to reduce the amount of their tax credit to reflect the higher take-up of the credit by fraudsters taking advantage of lax verification. And any reduction in the credit amounts would bring with it additional political and policy implications, including lower coverage rates.

Firewall Concerns

Finally, the tax credit “firewall”—designed to ensure that only individuals without access to other health insurance options receive federal subsidies—could also present procedural concerns. Specifically, pages 27 and 28 of the bill make ineligible for the credit individuals participating in other forms of health insurance, several of which—Tricare, Veterans Administration coverage, coverage for Peace Corps volunteers, etc.—lie outside the Finance Committee’s jurisdiction.

If the Senate parliamentarian advises for the removal of references to these programs because they lie outside the Finance Committee’s jurisdiction, then participants in those programs will essentially be able to “double-dip”—to receive both the federal tax credit AND maintain their current coverage. As with the immigration provision outlined above, such a scenario could significantly increase the tax credits’ cost—requiring offsetting cuts elsewhere, which would have their own budgetary implications.

Senate sources indicate that this “firewall” concern could prove less problematic than the immigration concern outlined above. While the immigration provision extends new programmatic authority to the Administration to develop a revised eligibility verification system, the “firewall” provisions have the opposite effect—essentially excluding Tricare and other program recipients from the credit. However, if the parliamentarian gives guidance suggesting that some or all of the “firewall” provisions must go, that will have a significant impact on the bill’s fiscal impact.

Broader Implications

Both individually and collectively, these four potential procedural concerns hint at an intellectual inconsistency in the House bill’s approach—one Yuval Levin highlighted in National Review last week. House leaders claim that their bill was drafted to comply with the Senate reconciliation procedures. But the bill itself contains numerous actual or potential violations of those procedures—and amends some of Obamacare’s insurance regulations, rather than repealing them outright—making their argument incoherent.

Particularly when it comes to Obamacare’s costly insurance regulations, there seems little reason not to make the “ol’ college try,” and attempt to repeal the major mandates that have raised premium levels. According to prior CBO scores, other outside estimates, and the Obama Administration’s own estimates when releasing the regulations, the major regulations have significant budgetary effects. Republicans can and should argue to the parliamentarian that the regulations’ repeal would be neither incidental nor extraneous—their repeal would remove the terms and conditions under which Obamacare created its insurance subsidies in the first place, thus meeting the Byrd test. If successful, such efforts would provide relief on the issue Americans care most about: Reducing health costs and staggering premium increases.

When it comes to the tax credit itself, Republicans may face some difficult choices. Abortion and immigration present thorny—and controversial—issues, either one of which could sink the legislation. When it comes to the bill’s tax credits, the “Byrd bath,” in which the parliamentarian gives guidance on what provisions can remain in the reconciliation bill, could become a bloodbath. If pro-life protections and eligibility verification come out of the bill, a difficult choice for conservatives on whether or not to support tax credits will become that much harder.

Three Points CBO Omitted from Its Report on Obamacare Repeal

This morning, the Congressional Budget Office (CBO) released a report analyzing the effects of Obamacare repeal. Specifically, CBO claimed that enacting a reconciliation bill that the last Congress passed, but President Obama vetoed, would increase the number of uninsured (even relative to pre-Obamacare numbers) while raising insurance premiums appreciably. CBO believes that leaving Obamacare’s major insurance regulations in place—which last year’s reconciliation bill did—while repealing the law’s subsidies, and effectively repealing the individual mandate, will destabilize insurance markets, cause insurers to exit the marketplace, and raise premiums.

However, there are three important facts the CBO report didn’t address:

CBO Has Gotten Previous Estimates Wrong

While no forecaster has a perfect batting average, CBO’s track record with respect to Obamacare is perhaps less ideal than most. CBO thought that the CLASS Act—which Democratic Senator Kent Conrad infamously called “a Ponzi scheme of the first order, the kind of thing for which Bernie Madoff would be proud of—could be implemented in an actuarially sound manner. The Obama Administration eventually had to admit that the CLASS Act was not a fiscally sound program. And CBO failed to conduct enough analysis that could have predicted the CLASS Act’s failure prior to Obamacare’s passage—a point former Director Doug Elmendorf has publicly refused to admit.

With respect to enrollment, CBO significantly over-estimated the number of individuals that would sign up for Obamacare. In March 2010, as Democrats were ready to pass the law, CBO claimed that in 2016, 21 million individuals would sign up for coverage on insurance Exchanges. The reality has proven far different: Less than half as many individuals (10.4 million) had Exchange coverage as of June 30, 2016. And this much lower enrollment comes despite the 2012 Supreme Court ruling making Medicaid expansion optional for states—which actually increased Exchange enrollment in states that have declined to expand Medicaid.

CBO claimed in 2010 that the individual mandate would cause tens of millions of individuals to sign up for coverage. It hasn’t happened. Now CBO claims that effectively repealing the mandate while leaving insurance regulations in place will cause healthy individuals to cancel coverage en masse. Could that happen? Absolutely. But given their recent track record on this specific issue, should one really take CBO’s word as gospel…?

The Solution Is More Repeal, Not Less

In a paradoxical way, the CBO report actually makes a strong case for expanding the scope of last year’s reconciliation bill. The paper notes on several occasions that repealing Obamacare’s insurance subsidies, and effectively repealing the individual mandate, while leaving its insurance regulations in place, would harm insurance markets. For instance, CBO notes that:

The number of people without health insurance would be smaller if, in addition to the changes in [last year’s reconciliation bill], the insurance market reforms mentioned above were also repealed.

Congress chose not to litigate the question of whether Obamacare’s major insurance mandates were budgetary in nature, and thus could be included in a budget reconciliation bill, last year. It should do so now. The findings of this CBO paper, along with other scoring estimates, give ample ammunition to those who consider it entirely consistent with past Senate precedents to include repeal of the major insurance regulations in budget reconciliation.

The Trump Administration Can Mitigate Repeal’s Effects

Even if Congress cannot or will not expand the scope of the reconciliation bill to include the major insurance regulations under Obamacare, the Trump Administration can act to mitigate against the kinds of concerns outlined in the CBO paper. A report I released just this morning outlines some of them. The Administration can significantly shorten—to just a few weeks, or even shorter—the annual open enrollment period, which can protect against individuals signing up for coverage after they get sick. It can reduce special enrollment periods outside of open enrollment, and require verification for all special enrollment. And it can take other administrative actions to mitigate the effects of a spike in premiums.

More CBO Transparency Could Have Prevented Obamacare’s CLASS Debacle

Mere days into a Republican Congress, Democrats are making charges of ideological bias when it comes to the majority’s handling of the Congressional Budget Office (CBO). Last Friday, a group of leading Senate Democrats wrote a letter to Speaker Boehner specifically noting that “a CBO director should not be required to revise the score of the Affordable Care Act in order to please partisan interests.” It’s an ironic charge, given that it’s far from partisan to question why the CBO failed to perform analyses that could have predicted the collapse of an $86 billion Obamacare program—exactly what happened under its current director, Doug Elmendorf.

The program in question, Community Living Assistance Services and Supports, or CLASS, was designed to provide cash benefits for those needing long-term services and supports. CLASS made it into Obamacare at the behest of then-Sen. Ted Kennedy, and over the objections of both Republicans and moderate Democrats, who considered it fiscally unsustainable; then-Senate Budget Committee Chairman Kent Conrad (D-ND) famously dubbed CLASS “a Ponzi scheme of the first order, the kind of thing Bernie Madoff would have been proud of.” And so it proved—in October 2011, less than two years after the law’s passage, the Department of Health and Human Services determined CLASS could not be implemented in a fiscally solvent manner, and in January 2013, Congress repealed it entirely.

But Congress and the American people could have been spared this trouble had CBO performed a more thorough analysis of CLASS. In 2009, the budget agency assumed that CLASS’ administrative expenses would remain confined to three percent of premiums, even though HHS’ own actuary later called this requirement “unrealistic and undesirable.” The actuary hired by HHS went on to estimate total expenses at 20 percent of premiums—nearly seven times the level specified in the law.

The unrealistically low administrative expenses go to the heart of CLASS’ structural flaws. The program proved fiscally unsustainable because it faced a classic actuarial death spiral—a lack of healthy people paying into the pool to fund benefits for those needing care.

Had CBO formally analyzed CLASS’ administrative expenses, it likely would have concluded that the unrealistic assumptions written into the law meant premiums would eventually have to rise, benefits fall, or both, to meet the shortfall—making the program even more unattractive to healthy individuals, and further imperiling its solvency. The Congressional Budget Office does have models to estimate the cost of insurance; with Obamacare, it stated in November 2009 that insurance Exchanges would reduce the administrative costs of individually-purchased coverage. But when it came to CLASS, CBO did not perform a similar analysis.

Likewise, CBO at no point attempted to quantify the potentially massive costs to states that CLASS would have imposed. The program would have required state Medicaid programs to create a benefit eligibility system similar to that used by the Social Security disability insurance program. That program costs nearly $3 billion to administer every year—meaning CLASS could easily have imposed costs to states of $20-30 billion over a decade.

Within HHS, officials expressed concern that CLASS would “create significant new burdens on the states.” Coming at a time when governors of both parties were criticizing the “mother of all unfunded mandates” in the form of Obamacare’s Medicaid expansion, a CBO finding that CLASS imposed mandates on states in the billions, or tens of billions, would have prompted bipartisan outrage—and could have scuttled the program entirely. But from its introduction to its repeal, CBO at no point even acknowledged the significant cost to states associated with CLASS.

In fairness to CBO, the months leading up to Obamacare’s passage were by far the busiest in my time as a Capitol Hill staffer. Lack of enough hours and lack of sleep could, and did, cause details to slip through the cracks; to quote Nancy Pelosi, we really did have to pass the bill to find out what was in it. But that neither excuses nor explains why CBO has not publicly acknowledged the shortcomings outlined above, and what if anything it needs to change—whether in resources, oversight, or both—to improve its analysis going forward.

Judging from his silence on CLASS, Dr. Elmendorf may view protecting his office’s budget analysts as a prime objective of a CBO director. As much as I value loyalty, CBO’s prime loyalty should lay to Congress—and ultimately to the public, which funds both CBO and the programs it analyzes. While Dr. Elmendorf has taken measures to release more information publicly—developments I welcome—such steps generally fall into the realm of making CBO less opaque, rather than truly transparent.

Democrats’ political posturing aside, it’s not partisan to ask for a public explanation why an independent budget office did not produce analyses that could have revealed the instability of an $86 billion “Ponzi scheme” before Congress enacted it into law. In fact, the principles of good governance should compel the Congressional Budget Office in exactly this direction. Hopefully CBO’s next director, whoever he or she is, will move more rapidly down the road of this much-needed transparency.

This post was originally published at the Washington Examiner.

Kathleen Sebelius: Just Another Insurance Salesman

Amidst all the attention given to the CLASS Act since HHS’ decision to shelve the program, one interesting element not drawing much attention is what all the possibilities HHS explored to make the program solvent have in common – they all represent insurance industry tactics condemned by Democrats.  Given that Secretary Sebelius frequently alleges that Obamacare ended “the insurance industry’s worst abuses,”* it’s worth pointing out that the Department’s report on the program revealed just how HHS and Secretary Sebelius proposed reinstating each and every one of those “insurance industry abuses” with respect to the CLASS Act:

Pre-Existing Condition Exclusions:  Page 39 of the report talks about proposals that would “impose a fifteen-year waiting period for the receipt of benefits on enrollees” with pre-existing conditions at the time of enrollment.  By point of comparison, health insurers can only impose a pre-existing condition waiting period of only 18 months – not the fifteen years proposed by HHS.

Limited Benefits:  Page 40 of the report talks about a proposal to “provide a very low benefit amount to individuals who become eligible for benefits in the first twenty years after enrollment.”  Only after two decades would enrollees qualify for the $50 daily benefit provided for in the statute.

“Unreasonable” Premium Increases:  Much of the report discusses imposing annual premium increases on enrollees, even though that is not explicitly provided for in the statute.  The memo to Secretary Sebelius accompanying the CLASS report notes that modeled premiums ranged “between $235 and $391 dollars [sic] a month, and may cost as much as $3,000 per month.”  Additionally, page 44 of the report notes that “the Secretary and the Board might conclude that…the reasonable premium increases…are inadequate to avoid insolvency.”  In other words, premiums would start out at a high level, increase every year – and an “unreasonable” premium spike would be possible, even probable.

“Cherry Picking:”  The former CLASS actuary told the Associated Press that the program could be made solvent.  However, the actuary’s ideas “would involve marketing the plan first to groups of primarily healthy people, and also possibly requiring those in poor health to wait longer before they could receive benefits.”

In other words, in an ultimately futile attempt to make CLASS solvent, the Obama Administration attempted to employ the exact same types of “sleazy” insurance industry practices Democrats have so frequently, and vociferously, derided – throwing up obstacles so that the sickest patients would not be able to benefit from CLASS.  These developments raise some interesting questions for HHS:

  • Does Secretary Sebelius plan to give her own Department an Obamacare waiver, for trying to sell limited benefit policies under CLASS?
  • Will HHS put CLASS on the “naughty list” of insurance plans with “unreasonable” or “unjustified” premium increases, given the way in which premiums were virtually guaranteed to skyrocket under the program?
  • Given that CLASS was subject to spiraling premium increases, will HHS stop accusing carriers who need to raise premiums due to Obamacare’s costly insurance mandates for spreading “misinformation?”

It’s not a surprise that HHS had to go to such lengths to salvage the CLASS program; the non-partisan Medicare actuary knew from Day One the plan wouldn’t work, and even Budget Committee Chairman Conrad called the program a “Ponzi scheme of the first order.”  But the larger point is this:  Whether due to self-righteous indignation, political posturing, or both, liberal Democrats have always found it easy to criticize health insurers – which is why Secretary Sebelius’ biography claims that Obamacare will end “the insurance industry’s worst abuses.”*  However, having now proposed engaging in every single one of those “abuses” herself, perhaps the Secretary and the Obama Administration will act with a bit more humility when it comes to having politicians criticize, and bureaucrats micro-manage, private sector actors in health care.

 
* Other commentators have noted that Obamacare did not actually end these “abuses,” at least not with respect to offerings made by some of the President’s key liberal allies.  The above analysis ignores the validity of those claims for purposes of this e-mail only.

CLASS Scandal: Bigger Than Enron

The Administration’s Friday decision not to go forward with CLASS implementation means that the program has now been definitively exposed as an accounting gimmick, with $86 billion in “deficit savings” wiped away in an instant.  Yet Democrats’ reaction to these vaporized savings has been decidedly ho-hum:  HHS dumped their decision out on a Friday afternoon, leading Democrats in both chambers have not a thing on their websites about the CLASS developments, and liberal bloggers are even arguing that the government “worked exactly the way it ought to.”

Compare that (non-)reaction to the Enron scandal, which reached its peak almost exactly one decade ago.  Enron’s accounting shenanigans wiped out $70 billion in shareholder value – $16 billion LESS than went “Poof!” when the CLASS Act collapsed on Friday.  And in 2001, Democrats reacted with righteous fury to the Enron scandal.  For instance, Henry Waxman established an “Enron tipline” on his website, called the company’s collapse “breathtaking,” and said the executives’ behavior was an “outrage.”

So where’s the outrage from Democrats here?

  • Will Henry Waxman be establishing a “CLASS tipline,” to see whether any HHS employee whistleblowers might have insights into why the many independent warnings about CLASS were ignored?
  • Why do liberals say the vaporization of tens of billions of shareholder equity is a massive outrage, but government $86 billion in “deficit savings” evaporating in an instant doesn’t merit a word of mention?
  • If a private company – and not the government – announced that a Madoff-esque scheme wiped out more shareholder value than occurred with Enron, would liberals claim such a scenario meant the private sector “worked exactly the way it ought to…?”

There is however one big difference between Enron and CLASS: Democrats knew about the CLASS Act’s problems all along.  The non-partisan Medicare actuary knew from Day One the plan wouldn’t work, and even Budget Committee Chairman Conrad called the program a “Ponzi scheme of the first order.”  That fact makes Democrats’ deafening silence on the program’s entirely predictable failure that much more telling.

Fast Facts: CLASS Act Fiasco Highlights Obamacare’s Flaws

Republicans warned: “The CLASS Act is another classic gimmick of budgetary shenanigans.”

Senator Gregg, 12/2/2009

The Obama Administration promised: “This is not a budget gimmick.”

OMB Director Orszag, 3/4/2010        

What happened: “We have not identified a way to make CLASS work.”

                                                                                          HHS Secretary Sebelius, 10/14/2011

 

  • During the Obamacare debate, the controversial long-term care program CLASS was widely derided as a budget gimmick.  Even Democrat Budget Committee Chairman Conrad called it a “Ponzi scheme of the first order.”
  • Under Republican questioning last February, HHS Secretary Sebelius admitted that CLASS was “totally unsustainable” as written, though she claimed she could fix the program unilaterally.
  • Last Friday, the Obama Administration finally announced there was not a “viable path forward for CLASS implementation” and that it would drop the program.
  • Yesterday, CBO announced that repealing CLASS would not cost taxpayers any money, contrary to earlier claims by the law’s supporters.
  • The Administration says that CLASS collapsed because of substantial uncertainty surrounding long-term care insurance.  But the forecast for the rest of Obamacare is just as uncertain.
    • The law assumes that employers will not drop health coverage, but countless studies, reports, and surveys point to large numbers of businesses cancelling health insurance.
    • If this trend continues, the cost of Obamacare could swamp the federal balance sheet and render the entire law fiscally unsustainable.
  • The next step is to repeal the CLASS Act – over President Obama’s objections if necessary – along with the rest of Obamacare, and replace them with common-sense reforms that truly lower costs.

Repeal and Reconciliation

The Hill yesterday quoted Budget Committee Chairman Conrad as saying a Republican plan to utilize the reconciliation process to repeal Obamacare in 2013 would be an inappropriate use of reconciliation, because in his words the Congressional Budget Office claimed that “repealing the entire health care law would dramatically increase the deficit.”  It’s worth unpacking that statement a bit more, to examine all the ways in which CBO’s conclusions have been undermined just in the past two weeks:

  • The future of the CLASS program – and its supposed $86 billion in budgetary “savings” – were thrown into grave doubt, when the program’s actuary left his job and all the other employees were reassigned.  Even Chairman Conrad has disparaged this program, famously calling it a “Ponzi scheme of the first order” – yet much of Obamacare’s supposed “deficit reduction” comes from premiums paid into the program in its first few years (even though the program will have major solvency problems thereafter).
  • The liberal Center for Budget and Policy Priorities released a report citing as conventional wisdom the belief that Obamacare’s insurance subsidies will have to be increased – thus reducing the law’s supposed “savings.”
  • A little-noticed passage of the Institute of Medicine’s report about the essential health benefits package cited two separate studies suggesting that Exchanges might attract sicker-than-average individuals.  But when analyzing the bill in 2009, CBO assumed that Exchanges would enroll healthier-than-average Americans due to the individual mandate.  If the two studies cited in the IOM report are right and CBO is not, then premiums in the Exchange – and thus federal spending on subsidies – could be much higher than expected.

Of course, these developments don’t even begin to address the biggest issue in the room:  The many 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, leading spending on subsidies to explode – shattering the deficit reduction “savings” in the process.

But Chairman Conrad’s comments implicitly raise another question, and that’s this:  In March 2010 President Obama barnstormed around the country asking for an “up-or-down vote” on the 2,700 page bill.  Leader Reid and Democrats complied, sending a letter to then-Speaker Pelosi stating that “We support an up-or-down majority vote” to enact Obamacare.  After all their exhortations about an up-or-down vote to pass Obamacare in 2010, do Democrats believe that a Republican President in 2013 should have the same opportunity for an up-or-down vote to repeal Obamacare?  Or does the Obama talk of “I won” and Harry Reid’s policy to “Stand up and vote” only apply to passing Democrat laws and not Republican ones?

Fast Facts: Obama Throws Good Money After Bad

Taxpayer-funded PR for Unsustainable CLASS Act

 “We very much share the concerns that have been expressed that, as written into the law, the framework of the program was not sustainable.”

Secretary Sebelius, 2/16/11

At a time when the federal government is running trillion-dollar deficits, the Obama Administration has proposed spending yet more taxpayer dollars to launch a PR campaign aimed at promoting the CLASS Act—a new Obamacare entitlement that even Secretary Sebelius admits is at risk of becoming “immediately insolvent.”

  • Non-partisan experts and actuaries have consistently warned that the program could become unsustainable without a massive taxpayer bailout.
  • The independent Medicare actuary concluded that there is a “very serious risk” of the CLASS program becoming unsustainable, and the President’s own Fiscal Commission recommended that the “financially unsound” program be significantly reformed or repealed entirely.
  • Senate Budget Committee Chairman Kent Conrad famously called the program “a Ponzi scheme of the first order, the kind of thing Bernie Madoff would have been proud of.”
  • Senators Shelby and Thune wrote last week to Secretary Sebelius to express concern that the Administration plans to “use federal resources on television ads in an effort to mislead Americans that the CLASS Act is fiscally sound.”

The Administration has provided no details about how it believes it can turn a totally unsustainable entitlement into a solvent program, yet it already has plans to spend more taxpayer funds for a PR campaign to promote the program.  It’s just another sign that Obamacare will prove to be a budget-buster for the federal government.

How Failing on Entitlement Reform Will Damage Growth

Amidst the ongoing debate over taxes, entitlement reform, and the nearly nonexistent economic recovery, it’s worth examining a study released earlier this year that quantified the relationships among the three.  The paper examined several possible scenarios that would fund the projected increase in federal health spending between now and 2060; according to the Congressional Budget Office, that projected increase in spending amounts to over 8% of GDP – more than one trillion dollars a year, based on the size of the economy today.  One scenario analyzed an increase in all marginal income tax rates, but maintained the share of taxes paid by individuals in each income segment; another scenario analyzed an across-the-board increase in payroll tax rates.  The latter scenario was less progressive, as the payroll tax increase hit all taxpayers equally hard.  The results were intriguing indeed:

  • Under the first scenario – in which proportional increases in income taxes were used to fund our growing obligations to Medicare, Medicaid, and other health care entitlements – those tax increases reduced per-household GDP by 11 percent by 2060.  That amounts to a $15,500 per-household loss in GDP solely due to the tax increases needed to fund our current health care entitlements. (Household GDP spending would be $133,900 in 2060 under the income tax increase scenario; a baseline scenario with no tax increases yielded household GDP of $149,400.)
  • Under the second scenario – in which payroll tax increases were used to fund the growth in health care entitlement spending rather than income taxes – tax increases reduced per household GDP by 5.2 percent by 2060.  That’s significantly less than the 11 percent GDP reduction in the first scenario, but it’s still an economic loss of more than $7,300 per household.

The study’s authors use the findings to conclude that “less progressive financing generates smaller efficiency costs” and that “the steeply rising efficiency cost of tax distortions (and political opposition to further tax hikes) may ultimately temper health care spending growth in the coming decades.”  Policy-makers can use the study to draw three conclusions:

  1. Tax increases damage economic growth and cost jobs;
  2. Progressive taxes that “soak the rich” have an even greater negative economic impact; and
  3. Absent substantial reform, the magnitude of the tax increases needed to support our unsustainable entitlement programs will themselves be economically painful and unsustainable.

Given all this, it’s particularly ironic that yesterday Sen. Conrad unveiled to his Democrat colleagues (but not to the public unfortunately) his “secret” budget plan.  According to reports, it raises taxes by $2 trillion, while reducing Medicare spending only $29 billion (this in a program scheduled to spend a whopping $6.3 trillion this decade).  Based on all the evidence above, on both economic and fiscal policy, it’s exactly the wrong approach.