How Obamacare Will Further Explode the Deficit
This column by ACRU General Counsel and Policy Director for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published June 16, 2011 on Forbes.com.
President Obama bludgeoned Obamacare through Congress on the claim, backed by the Congressional Budget Office, that it would not add to the deficit, even though it adopts or wildly expands three entitlement programs. As I discuss in my new book available this week from HarperCollins, America’s Ticking Bankruptcy Bomb, close analysis of the CBO score and other new numbers indicates that, quite to the contrary, Obamacare will likely add $4 to $6 trillion to the deficit over the next 20 years, and possibly more.
There were three enormous conceptual errors in the CBO score, in addition to the budget trickery indentified by now House Budget Committee Chairman Paul Ryan. The first relates to the new middle class entitlement health insurance program adopted by Obamacare. It added a whole new federal entitlement program providing government subsidies for the purchase of health insurance for families earning up to four times the poverty level, or $88,000 for a family of four. The eligibility thresholds, moreover, are indexed to grow over time. By 2014, this new program will be providing $3,000 in taxpayer funds to families making $95,000 per year. By 2018, almost $5,000 will be going to families making $102,000.
These health insurance subsidies go only to those who buy insurance on their own individually through state based health insurance exchanges set up by the legislation. Those who receive employer provided coverage are not eligible for them. CBO assumed that only 30 million workers will obtain their health insurance through the exchanges, with the rest of a work force estimated at 162 million in 2014 still receiving employer provided coverage. Of those 30 million, CBO estimated that only 19 million would receive the subsidies at a cost of $450 billion over the first 10 years, or actually the first 6 years of implementation under the Act.
But with the mandated insurance likely to cost $15,000 or more by 2016, employers will have powerful incentives to dump their employee coverage and pay the $2,000 per worker fine that applies to such termination of coverage. Employers are all the more likely to do this and pay their workers higher wages in place of the health coverage precisely because the workers would then be able to get the huge subsidies for purchasing their insurance through the exchanges, effectively a net income increase. As former CBO Director Douglas Holtz-Eakin reported in a paper for the American Action Forum,
“For example, a family earning about $59,000 a year in 2014 would receive a premium subsidy of about $7,200. A family making $71,000 would receive about $5,200; and even a family earning about $95,000 would receive a subsidy of almost $3,000. By 2018,…a family earning about $64,000 would receive a subsidy of over $10,000, a family earning $77,000 would receive a subsidy of $7,800 and families earning $102,000 would receive a subsidy of almost $5,000.”
In fact, in the exchanges, low and moderate income workers can even get subsidies covering their out-of-pocket expenses.
Holtz-Eakin calculated that employers could gain the enormous savings from dropping the coverage and just paying the $2,000 penalty, while giving their employees a net pay raise because of these enormous subsidies, for all workers making roughly $60,000 per year or less. That means it would make sense for employers to drop their coverage for 43 million additional workers who would then receive the subsidies at taxpayer expense for obtaining their insurance through the exchanges. That alone would triple the $450 billion in estimated costs for the health insurance subsidies of Obamacare under the first 6 full years, adding nearly a trillion dollars to the costs and deficits of Obamacare during that time alone.
But a new study released by McKinsey & Company earlier this month concluded that Obamacare will result in “a radical restructuring of employer-sponsored heath benefits.” It found that “30% of employers will definitely or probably stop offering” employer health coverage after Obamacare is implemented, and “among employers with a high awareness of reform, this proportion increases to more than 50%.”
In the June 8 Wall Street Journal, Grace-Marie Turner, President of the Galen Institute, estimated based on the numbers in the McKinsey report that as many as 78 million Americans would lose their employer provided coverage. If those workers ended up receiving the new Obamacare exchange subsidies, the estimated costs for those subsidies in the first 6 years alone would soar by 5 times, adding $2 trillion to the costs and deficits of Obamacare during that time.
What happened to President Obama’s oft-repeated pledge that if you like your health insurance you can keep it? Another transparent manipulation of the public was Obama telling us on national television there is no way Obamacare’s individual mandate can be considered a tax, and then sending his government lawyers into court to argue that the individual mandate is constitutional because it is simply a tax. I predict that the Fourth Circuit Court of Appeals will issue a ruling soon upholding the individual mandate on the grounds that it is a tax.
The second conceptual fallacy in the CBO score was revealed in full by the 2010 Financial Report of the United States Government, released last December by the Treasury Department. It documents the total present value of the future cuts to Medicare under Obamacare at $15 trillion, primarily in payments to doctors and hospitals for health care provided to seniors.
Such draconian cuts in Medicare payments would create havoc and chaos in health care for seniors. Doctors, hospitals, surgeons and specialists providing critical care to the elderly such as surgery for hip and knee replacements, sophisticated diagnostics through MRIs and CT scans, and even treatment for cancer and heart disease would shut down and disappear in much of the country, and others would stop serving Medicare patients. If the government is not going to pay, then seniors are not going to get the health services, treatment and care they expect.
Indeed, Medicare’s Chief Actuary reports that even before these cuts already two-thirds of hospitals were losing money on Medicare patients. Health providers will either have to withdraw from serving Medicare patients, or eventually go into bankruptcy. The unworkable, draconian effect of these Medicare cuts is why the U.S. Government Accountability Office issued a disclaimer of opinion on the Statement of Social Insurance component of the federal government’s 2010 Financial Statement, saying, “Unless providers could reduce their cost per service correspondingly, through productivity improvements, or other steps, they would eventually become unwilling or unable to treat Medicare beneficiaries.”
Now here’s the dirty little secret in Washington as to why you haven’t heard about this before. No one expects these cuts to actually be implemented. Congress has routinely extended the implementation of such cuts in the past. If they lag in doing so again, first the doctors and hospitals, and then the seniors and their Washington lobby fronts, will start screaming until no one else can be heard on anything. So we got passage of the massive new Obamacare entitlement on the basis of a deficit score including trillions in future cuts that no one expects to be implemented. This would not be the first time that Washington has done this. Of course, reversing those cuts would add $15 trillion to the future deficits caused by Obamacare.
A third major factor dramatically increasing the resulting deficits under Obamacare is that the tax increases won’t raise nearly the revenues that CBO projects. Considering as well President Obama’s general tax increases now scheduled for 2013, the capital gains tax rate would increase by close to 60% that year, with the expiration of the Bush tax cuts and the Medicare payroll tax soon applying to capital gains as well. But over the last 40 years, every time the capital gains tax rate has been increased, revenues have declined.
Similarly, the tax rate on dividends would nearly triple in 2013, due again to the expiration of the Bush tax cuts and the application of the Medicare payroll tax to dividends as well. The last time dividend taxes were that high, corporate dividend payments were greatly reduced. Corporations just kept the money internally for corporate investment. Corporate earnings are already subject to the 35% corporate income tax rate. So revenues from the tax on dividends will decline sharply as well, exactly the opposite of what happened when President Bush cut the tax rate on dividends in 2003. CBO, of course, has a horrid record of wildly failing to estimate the revenue effects of tax changes relating to capital gains and corporate dividends in particular.
Moreover, as employers drop employee coverage under Obamacare, revenues from the new taxes on health insurance will fall short as well. Expect companies to cut back on high value, “Cadillac,” health insurance plans in particular, taxed heavily under Obamacare. To the extent that employers respond to the employer mandate by reducing hiring, or even laying off existing workers, that will cause a loss of income tax and payroll tax revenues, further adding to the deficit. Indeed, the employer mandate seems to have had such an effect even before it has become effective.
These and still other reasons are why I estimate in my book that Obamacare will actually end up increasing the federal deficit by $4 billion to $6 billion over the first 20 years alone, which is further confirmed by subsequent events. As I sit here writing this, I am beginning to think even that will be a woeful underestimate.