I Don’t Think Charles Blahous Understands the CBO’s Models or the Politics of Medicare

One of the key assumptions in the Congressional Budget Office’s model — upon which it based its conclusion that the Affordable Care Act will reduce the deficit — is that the depletion of Medicare’s trust fund will be ignored and Congress will simply continue spending to maintain Medicare’s benefits. One of the key assumptions in Charles Blahous’ new study — which says the CBO flubbed it and the ACA will actually worsen the deficit — is that this depletion will most certainly not be ignored. From a follow up defense Blahous wrote of his study, which I think best encapsulates his logic on this point:

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.

What this doesn’t answer is the question of why this is so. Does Blahous really think voters, and thus Congress, are concerned with the trust fund qua the trust fund? Of course they aren’t — neither the vast majority of voters nor legislators are policy wonks. What concerns them is whether Medicare’s benefits will keep coming as they always have. Voters and politicians are concerned with the insolvency of the trust fund only to the extent they think it will stop Medicare from buying retirees’ health care. “Trust fund solvency” is a stalking horse for “continuation of benefits.”

CBO assumes that when the chips are down, Congress will break the link between the trust fund and Medicare benefits. It will let the trust fund die, and continue funding Medicare out of general revenue. This shift would occur sometime in the next decade or two. And yes, I’m sure as news reports came filtering out that Medicare’s trust fund was going insolvent, there would be a bit of panic. But as soon as voters realized their Medicare benefits were still coming, the issue’s political potency would utterly vanish. To claim otherwise is to claim American politics values an abstraction (the solvency of the trust funds) over a concrete reality (whether Medicare benefits keep coming). Does anyone doubt me on this point?

This leads to a profound irony in Blahous’ dismissal of CBO’s model. One of conservatives’ biggest critiques of the ACA is that Congress lacks the fiscal discipline to maintain some of the spending and tax changes the law calls for. They cite such things as the Sustainable Growth Rate, which passed in 1997 and was supposed to cut Medicare payment rates, but which Congress has postponed every year afterward. Fair enough. But the fiscal discipline required to honor current law, and slash Medicare benefits in conjunction with the depletion of the trust fund, would dwarf the discipline required to adhere to the ACA or the SGR. Which is precisely why CBO assumes Congress will display no such discipline, and just keep spending to maintain Medicare.

This is important, because it helps illuminate what may be Blahous’ key logical error — and the error of the rest of the ACA critics crying “double counting.” Here’s Blahous explaining double counting in the appendix of his study:

[I]magine a law that cuts Medicare HI payments by $1 while also spending $1 on a new health program. The $1 Medicare HI spending cut extends the solvency of the Medicare HI Trust Fund, thereby allowing Medicare HI to spend an additional $1 at a later date. The $1 of near-term Medicare savings thus results in an additional $1 of later Medicare spending. Thus, if the law also spends $1 on a new health program, then altogether the law would permit $2 in total new spending while enacting only $1 in savings. On the whole, such a law would increase spending and worsen federal deficits. The case is similar with the ACA.

This misses one absolutely critical detail: CBO assumes up front that all Medicare spending will be honored, so that additional $1 of later Medicare spending is already built into its model. It’s already accounted for that $1 of promised future spending with commensurately higher future deficits. So that $1 is already in the baseline against which CBO measured the effects of health care reform. When the ACA finds $1 of additional savings and enacts $1 of additional spending, those latter two dollars balance each other out. $1 of new savings, $1 of new spending, $1 of future spending, and $1 of future deficits. “Double counting” or no, the CBO’s math adds up. Throw in the other bits of new revenue the ACA pulls in, and you have a net reduction in the government’s deficits.

One last way to look at it: Consider the government’s finances before the ACA passed. The Medicare trust fund is predicted to go insolvent in the next decade, and the CBO’s unified budget model is predicting large future deficits and debt. Now imagine that to shore up Medicare, the government decides to pass a hike in the payroll tax. What happens?

First, the solvency of the trust fund is extended, because new bonds are issued. But this is also new revenue, so it also improves the budget outlook under the CBO’s model. No one, I think, will protest this logic, nor claim there is anything untoward going on here. But it is effectively “double counting” as Blahous and the ACA’s critics have defined it. Conversely, the same thing happens if you cut Medicare’s benefits rather than hiking the payroll tax. It makes the bonds already in the trust fund go further, which extends its solvency. At the same time, you’ve reduced the government’s overall level of spending, so its deficits shrink.

In point of fact, this second scenario is precisely what the ACA did. It cut Medicare’s payment rates, which improved both the trust fund’s solvency and the budget outlook. From there, the ACA instituted new spending to help people buy insurance on the exchanges. This had no effect on the trust fund as it wasn’t under the aegis of Medicare, but it did worsen the budget outlook again. Finally, the ACA found new revenue outside of Medicare — the excise tax, new fees, new penalties, etc. — which once again improved the budget outlook.

So, the first step improved both the trust fund’s solvency and shrunk the deficit. The second step expanded the deficit again, but didn’t effect the trust fund. The third step also didn’t effect the fund, but did shrink the deficit again. Add up the net effect of these three steps — first cuts, then spending, then revenue — and the CBO’s unified budget outlook shows a slightly smaller deficit in the first decade, and a much smaller deficit in the second decade, than we had before health care reform was enacted.

As Paul N. Van de Water points out at the Center on Budget and Policy Priorities, these kinds of Medicare savings have been enacted several times in the past, were “double counted” each time — including by Republicans — and no one ever batted an eye. The only difference this time around is that the savings happen to reside in the same package of legislation as a new entitlement conservatives happen to loath. The conceptual complexities of the trust fund gave them an opening to play silly games with accounting logic, and man did they all leap at the opportunity.

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