April 11, 2012

Why the Health Care Law Expands the Deficit: Charles Blahous Rebuts His Critics

Charles Blahous

J. Fish and Lillian F. Smith Chair

Among the few substantive objections raised to the paper yesterday were those voiced by Jon Chait, Paul Krugman, David Cutler and Paul Van de Water (I very much like and respect Paul V, by the way, despite our occasional analytical disagreements). I do not believe that the criticisms hold water for the following reasons.

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This article originally appeared in Forbes

On Tuesday the Mercatus Center published my study showing that the health care law (the Affordable Care Act, or ACA) enacted in 2010 will add over $340 billion to federal deficits over the next ten years.

The study has received a great deal of positive attention as well as some negative attention.  To a certain extent the attention is unsurprising.  Many are strongly invested both in and against the ACA for reasons that go far beyond the focus of my study.  Perhaps the most striking aspect of the criticisms has been that so few of them have been substantive.

For the record, the research is my own and does not reflect any other person’s policy agenda other than my own research interest in exploring the fiscal effects of a momentous change in law, something I was surprised to find that no one else had previously quantified.

The paper was subject to a double-blind peer review process, which means that I did not know who was reviewing the paper, and the reviewers did not know who had written it.  Prior to this formal review process, I also independently had the paper reviewed by several fellow experts in federal budgeting and health care financing to confirm that the analysis was correct.

Among the few substantive objections raised to the paper yesterday were those voiced by Jon Chait, Paul Krugman, David Cutler and Paul Van de Water (I very much like and respect Paul V, by the way, despite our occasional analytical disagreements).   I do not believe that the criticisms hold water for the following reasons.

1. There is no dispute that my study’s reading of the law is correct

As the Trustees’ report and many other government documents routinely attest, Medicare may under law only make payments if there is a positive balance in its Trust Funds.  “If assets were exhausted, payments to health plans and providers could be made only from ongoing tax revenues, which would be inadequate to cover total costs. Beneficiary access to health care services would rapidly be curtailed.”

To the extent that Medicare HI solvency is extended, its authority to make full benefit payments is thus also extended.  Again, there is no dispute about this.  Even Dr. Krugman’s criticism acknowledges that my study reflects “current law.”

2. There is no dispute that the scoring convention used to find that the ACA reduces federal deficits differs from actual law

Again, this is acknowledged in the criticisms of the study as well as by the Congressional Budget Officeitself.  As CBO states, “In keeping with the rules in section 257 of the Deficit Control Act of 1985, CBO’s baseline incorporates the assumption that payments will continue to be made after the trust fund has been exhausted, although there is no legal authority to make such payments.”

3. Critics are arguing that comparison to a hypothetical baseline is superior to measuring the actual change in law

The basis of the criticism is, thus, the contention that an evaluation based on the scoring convention’s hypothetical baseline is a better indicator of the likely budgetary effects of the ACA than is an analysis that analyzes the literal change in the law.

4. Crucially, for the critics’ contention above to be correct, there must be no increase in future Medicare spending as a result of the ACA’s extension of Medicare HI Trust Fund solvency.

The scoring convention assumes—in contrast with the law—that full Medicare benefit payments will always be made regardless of trust fund depletion. It thus counts all enacted Medicare savings as deficit-reducing, but does not count any added outlays associated with postponing statutory Medicare benefit reductions via an extension of its trust fund’s solvency.

The favorable budget score for the ACA depends wholly on this assumption.  In effect, it assumes that future Congresses will now engage in the same full amount of future Medicare cost-cutting as they would have if Medicare HI were still projected to be insolvent in 2016.

5. The available empirical evidence is decisively against the theory of government behavior outlined in #3 and #4 above.

The historical evidence is overwhelming that Congressional behavior is heavily influenced by Social Security and Medicare solvency determinations. Specifically, Congress is much less likely to enact cost-containment measures in either program when projected insolvency is more distant.

Supporters of the ACA have elsewhere made clear that they agree the ACA will extend the Medicare Trust Fund’s solvency, protect its spending authority, lessen the risk of near-term benefit reductions, and mitigate the urgency of further Medicare reforms.  Examples include David Cutler’s public policy memo, various Administration announcements, and Congressional Dear Colleagues.

These and countless other statements contradict the theory—on which the scorekeeping convention depends—that the extension of Medicare solvency is a budgetary non-event that leaves Congress just as likely to enact the same amount of further Medicare cost constraints as before the ACA was passed.


In sum, the literal change in law effectuated by the ACA clearly increases federal deficits, as even the critics of the study have conceded.  Beyond this, however, the empirical evidence contradicts the critics’ theory that the hypothetical scorekeeping convention is a better guide to future events, specifically as they relate to the practical budgetary impact of the ACA.  Both by statute and as a matter of political economy realities, the ACA clearly worsens the fiscal outlook.

One final note: another criticism–that this scorekeeping convention has been in use for decades and is often abused by Democrats and Republicans alike–is true but at least irrelevant, at worst misleading.  My study devotes a couple of pages to endorsing the use of the scorekeeping convention for many policy evaluation purposes, but points out that it also has drawbacks such as obscuring the worsening of federal finances under the ACA.  The fact that the convention is longstanding does not change its substantive imperfections.

More importantly, it has never before been put to the use that it has with the ACA: specifically, to depict a law that increases federal health care financing commitments by trillions of dollars over the upcoming decades as somehow improving federal finances.  I believe we all benefit from a full understanding of how prevailing scorekeeping conventions have obscured the problematic fiscal consequences of a significant change in enacted law.