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Obamacare won't shrink America's deficit: Erica Alini

Oft-quoted study really a guesstimate


(Source: CP)

How will the Affordable Care Act (ACA), better known as Obamacare, affect America’s fiscal trajectory? Ask the question and you’ll get one of two answers. Conservatives will tell you that Obama’s health reform will blow up the already ballooning federal healthcare bill. Expect graphic descriptions of a fiscal Apocalypse. Liberals will offer a more sober response that goes roughly like this: The Congressional Budget Office says that Obamacare will, if anything, slightly reduce the deficit. Don’t mistake sobriety for reliability, though. There are a number of holes in the celebrated CBO report.

For one, that estimate is now outdated. The CBO report dates back to March 2011, before the Supreme Court found that states have a right to choose whether or not they want to expand eligibility under the Medicaid healthcare program for the poor and the disabled as the ACA demands. The CBO has since issued a number of partial updates, but not a comprehensive new study. This matters a great deal in terms of federal outlays because the ACA established that Washington would cover most the the states’ costs of boosting Medicaid for the first few years of implementation. Since fully 21 states are not expanding coverage at this time, federal spending could actually turn out to be much lower than advertised.

The other big federal expense Obamacare introduced is subsidies for Americans who aren’t poor but fall below a certain income threshold. If these people don’t have health insurance via their employer, they get a cheque from Washington to help them buy — website permitting — individual policies on government-run exchanges. This poses a risk that’s very difficult for the CBO to quantify. The risk is that some employers could decide to terminate their insurance policies and offload their workforce onto the exchanges instead. Starting in 2015 businesses over a certain size will have to pay a penalty for not offering insurance, but the fine is much lower than the cost of providing health coverage, so the math seems stacked against Washington. Large employers aren’t likely to nix coverage because it would only lower morale and employee loyalty, but for small firms the incentive is real, according to Yale University’s Ted Marmor, a leading expert on welfare politics and policy. In general, fewer company insurance policies will mean more people on the exchanges and more of them receiving subsidies.

On the other side of the budget-balancing equation, one important way in which Obamacare supposedly achieves fiscal neutrality (or better) is by imposing some curbs on Medicare, the healthcare program for the elderly. Specifically, the ACA puts a cap on increases in payment rates for doctors and other Medicare providers that is below the expected increase in the cost of supplying those very services. If hospitals and doctors don’t find a way to do more with less, the CBO itself notes, those cuts “may be difficult to sustain over a long period of time.” Yet, by law, the CBO has to make its projections under the assumption that current laws will not be amended.

In short, the CBO forecast is only as good as its underlying assumptions, which, as the CBO itself notes, make for a rather wobbly foundation. While that doesn’t mean you should listen to the scare-mongers, it is reason to treat the oft-quoted guesstimate with a grape-sized grain of salt.