An Entitlement Certain to Grow In Spite Of ‘Firewalls’

From a new piece I have over at Kaiser Health News:

But even if all of the offsets work out as planned, which is not likely, the House and Senate bills would still create substantial budgetary risks because of the pressures for entitlement expansion they would unleash.

Both bills assume the new entitlement spending can be held down with the so-called “firewall” provisions. These are the rules that essentially preclude individuals from gaining access to premium subsidies available in the exchanges. If an employer offers "qualified" insurance coverage to a worker, the employee really has no choice but to take it if he wants to avoid paying the penalty for going uninsured. But these rules would create large disparities in the federal subsidies made available to workers inside and outside the exchanges.

Gene Steuerle of the Urban Institute has calculated that, under the Senate bill, a family of four with an income of $60,000 with employer-sponsored health care would get $4,500 less in federal support outside of the exchange than a similar family inside the exchange would get in 2016. And there would be many tens of millions more families outside the exchange than in it, according to CBO. Today, there are about 127 million Americans under the age of 65 with incomes between 100 and 400 percent of the federal poverty line, but CBO expects only about 18 million people will be getting exchange subsidies in 2016.

If enacted as currently written, it’s entirely predictable what would happen next. Pressure would build to treat all Americans fairly, regardless of where they get their insurance. One way or another, the subsidies provided to those in the exchanges would be made more widely available, driving the costs of reform well above the $900 billion limit the administration has set for the initiative.

You can read the whole thing here.

posted by James C. Capretta | 10:55 am
Tags: entitlements, firewall, spending
File As: Health Care

The House Bill: A $10 Trillion Unfunded Liability

Amid all the flurry of news in the hectic last days before the House recessed for the August break, something important went largely unnoticed — a development that should be the knockout blow to the kind of sweeping health-care bill the Obama administration is pushing, at least as it has been cobbled together in the House.

In a July 26 letter to the Ranking Republicans on four key committees (Ways and Means, Energy and Commerce, Education and Labor, and Budget), the Director of the Congressional Budget Office (CBO), Doug Elmendorf, made it clearer than he ever had before that the bill, in its original July 14 form, would dramatically widen the already large gap between long-term government revenue and spending. Here’s the key paragraph:

Looking ahead to the decade beyond 2019, CBO tries to evaluate the rate at which the budgetary impact of each of those broad categories would be likely to change over time. The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade. The reductions in direct spending would also be larger in the second decade than in the first, and they would represent an increasing share of spending on Medicare over that period; however, they would be much smaller at the end of the 10-year budget window than the cost of the coverage provisions, so they would not be likely to keep pace in dollar terms with the rising cost of the coverage expansion. Revenue from the surcharge on high-income individuals would be growing at about 5 percent per year in nominal terms between 2017 and 2019; that component would continue to grow at a slower rate than the cost of the coverage expansion in the following decade. In sum, relative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window.

In other words, CBO expects the spending in the bill would grow at a rate of least 8 percent annually into the indefinite future, while the revenue to pay for it will only grow at about 5 per cent per year. Hence the “substantial increases” in federal budget deficits beyond 2019.

Although CBO declined to specify any actual deficit numbers beyond 2019, they can be easily calculated, in rough terms, from the information provided in Elmendorf’s letter.

By 2030, if the spending associated with the coverage provisions rises 8 percent per year after 2019 and the revenue rises by 5 percent, the bill would add more than $200 billion per year to currently projected budget deficits. By 2048, the annual deficit increase would top $1 trillion — and only go up from there.

Of course, the federal government is already in a deep hole due to the projected rapid cost increases in Social Security and Medicare. The trustees for those programs reported earlier this year (see here and here) that Social Security’s seventy-five year unfunded liability stands at $5 trillion, while Medicare’s has reached at an astounding $36 trillion.

It is possible to do a similar “unfunded liability” calculation for the new entitlement spending in the House bill. Assuming a discount rate of 5.7 percent per year, the bill would add more than $10 trillion over seventy-five years in new unfunded government obligations.

Of course, some amendments were adopted to assuage the Blue Dogs in the Energy and Commerce Committee. The fate of those amendments is uncertain at best, however, as Speaker Pelosi has indicated the contents of the yet-to-be-written merged bill from the three committees will be decided later (to attract votes of course). But even if the Blue Dog amendments survive, they would do very little to change the basic direction of the bill’s long-term costs.

CBO recently projected that the federal budget deficit is already on track to reach nearly 15 percent of GDP in 2035, well above the historical average of about 2 to 2.5 percent. The last thing Congress should be doing is making the problem worse with new runaway costs. Indeed, the president himself has said he won’t accept a bill that makes our long-term budget problem worse. How he squares that with full support for the emerging House bill is anybody’s guess.

posted by James C. Capretta | 5:44 pm
Tags: House bill, projected costs, Doug Elmendorf, CBO, spending, deficit, Medicare, social security, Blue Dogs, Nancy Pelosi
File As: Health Care