Obamacare’s Red Ink

Will Obamacare save taxpayers any money?  Not according to the Senate Budget Committee, which estimates that the Affordable Care Act (ACA) will increase the federal budget deficit by $131 billion over the next decade.  The big surprise:  much of that higher deficit is the result of slower growth in the cost of health care.  Although less spending lowers the cost of Medicare and Medicaid, it also reduces the budget savings that were supposed to pay for the ACA’s new insurance subsidies.

The new report from Senate Republican budget experts picks up where the Congressional Budget Office (CBO) left off.  CBO’s most recent estimate, released in July 2012, projected that the ACA would reduce the deficit by $109 billion between 2013 and 2022.  It is now more than 2 years later, and it is time to update that analysis taking into account changes in the economy and the health sector that directly impact the cost of the legislation.

Unfortunately, CBO is not prepared to do an updated estimate.  Buried in a footnote to an April report updating estimates of the effects of the insurance coverage provisions of the law, theagency stated that neither CBO nor the Joint Committee on Taxation can determine the overall impact of the ACA on the federal budget.   The reason given:  it is too difficult to estimate the effects of the ACA on “previously existing programs” (such as Medicare and Medicaid) and on revenues.

There is no question that producing budget estimates is difficult, particularly years after a law is enacted when implementation has not always followed the plain reading of that law.  But there is also no question that CBO has produced two such estimates, in February 2011 and July 2012.  It is likely that the next Congress will call on CBO to estimate the impact of targeted changes to the ACA, though such estimates would not give policymakers a full understanding of the law in its current form.

The Senate analysis attempts to fill that gap.  Budget Committee staff extrapolated CBO’s July 2012 estimate to allow for two additional years in the budget window.  As a result, CBO’s estimated $109 billion in budget savings for 2013 through 2022 was updated to $180 billion in savings for 2015 through 2024.

The analysis also took into account the slower growth in health spending that we have seen in recent years and that CBO assumes will continue into the future.  That lowered the cost of expanding health insurance coverage through the subsidized exchanges and Medicaid by $83 billion over the next decade.

But that slower growth in spending also means that the ACA does not save as much as CBO estimated two years ago.  Those savings come mostly from cutting Medicare payments to hospitals, nursing homes, and other health care providers.  Budget Committee staff estimate the loss of savings at $132 billion.

The red ink comes in from the loss of tax revenue that results from the impact of the ACA on the labor market.  CBO estimated that the equivalent of 2.5 million full-time jobs would be lost by 2024 as people leave the labor market.  That lowers wage income and reduces tax revenue by $280 billion through 2024.

After other adjustments, the Senate report says the ACA will increase the federal budget deficit by $131 billion over the next decade.

Should we count the revenue loss associated with that loss of employment?  CBO does not measure the impact of such labor market effects in estimating the cost of legislation.  In most cases, that is a reasonable position.  Legislation typically is far more modest in scope than the ACA, and the economic impacts are likely to be negligible.

The ACA is a $2 trillion legislative behemoth whose broader economic impacts cannot be overlooked.  Budget estimators may ignore the loss of jobs, but policymakers do so at their own peril.

When he signed the bill into law, the President said that the ACA is paid for and will help lift a decades-long drag on the economy.  More likely, the taxpayers will be doing the heavy lifting.


Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute.

Morning Consult