Saturday, October 12, 2013

ACA: All Schemes Unravel, But What About Scheme-Finance-Unraveling?

“Advocates marketed the Affordable Care Act (ACA), known colloquially as "Obamacare," to the American public as a way to "bend the cost curve" of soaring health care costs downward. But despite its supporters' hopes, the 2010 legislation was fiscally reckless, markedly increasing the government's already-unsustainable health spending commitments at a time of record deficits. Three years later, the fiscal harm stemming from the ACA is as bad as-and even worse than-many experts predicted. The problem lies with the nature of the law itself, promising trillions in new government benefits while relying on dubious financing mechanisms. These problems were not only foreseeable, they were indeed widely foreseen.

Even before the president signed the ACA into law, non-partisan analysts demonstrated that the belief it would reduce federal deficits was based on a misunderstanding of government accounting. The ACA's projected savings from Medicare payment reductions were in effect being doubly committed: once to extend Medicare solvency and a second time to fund a massive coverage expansion. Both the Congressional Budget Office (CBO) and the Medicare Chief Actuary alerted Congress to the problem at the time. By counting projected savings only once, my own subsequent study demonstrated that the ACA would add roughly $340 billion to federal deficits in its first decade.

The reality was always likely to be worse than that estimate. The positive case for the ACA's financial integrity hung on two improbable outcomes: that all of its cost-savings provisions would work exactly as hoped, while none of its spending provisions would cost more than envisioned. Yet CBO warned at the time that many of the law's cost-saving provisions "might be difficult to sustain," while the Medicare Chief Actuary also warned that projected savings "may be unrealistic." My own conclusion after the law's passage was that, "the proceeds of such cost-savings cannot safely be spent until they have verifiably accrued."

No sooner was the ink dry on the ACA before these warnings began to prove correct. Many of the law's financing mechanisms started to unravel, while pressure mounted to expand its new spending programs. One of the first provisions to bite the dust was the CLASS long-term care program, suspended in 2011 due to its financial unsoundness. This wiped out a revenue source counted on to produce $70 billion during the first decade to help finance the ACA's coverage expansion.

The 2012 U.S. Supreme Court decision further complicated the law's financing. The original idea under the ACA was that states would expand Medicaid while more generous federal subsidies provide for others to buy health coverage from newly established exchanges. But the Court rendered Medicaid expansion optional for states, thus giving them an incentive to let the federal government shoulder the entire cost of subsidizing more generous insurance coverage for those above the poverty line. Many states are now taking advantage of this latitude, likely increasing federal costs for the exchanges.” - Obamacare's Financial Unraveling: Predictable, and Predicted, Real Clear Markets, 10/09/2013

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