• Double Counting Medicare Savings

    University of Minnesota professor Roger Feldman, with whom I’ve co-authored several papers, has written an opinion piece for the Minneapolis/St. Paul Star Tribune. He takes the Obama Administration to task for rhetorically double counting health reform’s Medicare cuts, once to shore up Medicare and once again to pay for expansion of health insurance. However, he notes CBO made no such error.

    The CBO did not make a mistake in its arithmetic. By law, it must estimate the effect of proposed legislation on the federal deficit, and … [not on] other federal programs [that] must be cut.

    The president, however, does not have to follow the same rules as the CBO. He could have told us that Medicare spending cuts can be used to fix Medicare or to pay for health insurance expansion, but not both. Instead, he chose to maintain the fiction that Medicare savings can be counted twice.

    … Congress should address Medicare reform and health insurance reform separately in future legislation. … However, the CBO should not change its method of scoring proposed legislation. The CBO is not responsible for maintaining the fiscal soundness of Medicare. But another federal agency, the Office of Management and Budget, should publish a budget that shows the future liabilities for all entitlement programs and these should be included in the president’s annual budget.

    Until we meet this challenge, we will continue to use bad arithmetic and budgetary tricks to hide the cost of health care reform.

    I would also prefer to see policy debates conducted in a climate of candor. Unfortunately one can’t count on everyone to behave that way. And neither side has an incentive to be fully open and honest. The proper penalty is to point it out, as Roger has. None of this changes the fundamental truth that the budget deficit problem is a health care spending problem. I don’t think anyone who follows the debate is under the illusion that that problem will be fixed with this reform alone. Obama may have tried to make the hole appear shallower than it is. But even half a deep hole is a deep hole.

    • From Center on Budget Policy and Priorities (Peter Orszag referenced on his blog yesterday):

      Claim: Medicare savings are double-counted.

      Fact: The Medicare savings in the legislation both reduce the budget deficit and extend the life of Medicare’s Hospital Insurance trust fund. Recognizing that fact does not constitute double counting.

      The health reform legislation contains provisions that slow the growth of Medicare spending — for example, by scaling back overpayments to private insurance plans that participate in Medicare, as Congress’ expert advisory body on Medicare has recommended for years — and provisions that increase Medicare tax revenues. The provisions affecting the Hospital Insurance part of Medicare necessarily have two types of effects:

      Viewed from an overall federal budget perspective, they help pay for expanding health coverage for the uninsured and contribute to overall deficit reduction. CBO has estimated that the provisions in the health reform legislation, including the provisions affecting Medicare costs and revenues, will reduce the federal deficit both in the 2010-2019 period and thereafter.

      Viewed from the perspective of Medicare’s Hospital Insurance (HI) trust fund, these provisions reduce expenditures out of the fund, increase its income, increase the balances in the fund, and prolong the fund’s life. The Office of the Actuary at the Centers for Medicare & Medicaid Services (CMS) has estimated that the Senate-passed bill (which has now been signed into law) will extend the solvency of the HI trust fund by ten years. [3]

      Both of these results flow automatically from the nature of the federal budget and the trust funds, and the normal, longstanding accounting rules that apply to them. No double-counting occurs.

      Deficit-reduction legislation has been accounted for in exactly the same way in previous Congresses under both political parties . For example, both the Balanced Budget Act of 1997 and the Deficit Reduction Act of 2005 (both of which were passed by Republican Congresses) included Medicare savings that reduced the federal deficit and improved the solvency of Medicare’s HI trust fund. No claims of double-counting were raised when these bills were enacted.

    • In response to Brad F’s comment about double-counting the Medicare savings: If only saying something were so could make it so, pigs could fly and deficits would disappear. Unfortunately, nothing can hide the fact that the health reform bill did not simultaneously preserve Medicare and pay for health insurance expansion.

      I consulted two distinguished academic economists and asked them to look at my editorial, as well as Peter Orszag’s blog and the recent posting by Paul Van de Water and James Horney at the Center for Budget and Policy Priorities. I did not ask their premission to quote them, so below is a paraphrased summary of their comments:

      The Medicare cuts alone would have reduced the tax burden, but the money saved was used to pay for health insurance for people under age 65. So Medicare’s fiscal problems are just as dire today as they were last week. What really matters is the present value of all government outlays compared with the present value of all receipts. This did not budge, hence the fiscal gap is unchanged.