July 24 2012

CBO Math on ObamaCare Explained

Hadley Heath

Today the CBO released two new reports on ObamaCare.  Remember that on July 11, the House of Representatives voted to repeal ObamaCare.  One of today's CBO reports examines the effect of repealing ObamaCare on the deficit.

ObamaCare is so expensive.  According to the CBO numbers, we will spend $1.17 trillion between 2013 and 2022 to finance the "insurance coverage provisions" in the law.  These include the big ticket items of subsidies for the health insurance exchanges and new Medicaid outlays related to the expansion.  

So how can be then, that repealing ObamaCare (that is, effectively undoing or forgoing $1.17 trillion in new spending) would increase the deficit?  How could not spending $1.17 trillion end up costing us money?

If ObamaCare did one thing well, it was arranging its many tax increases and Medicare cuts in such a way to hide its enormous cost.  While the federal government is busy spending $1.17 trillion, it will raise $569 billion in new taxes and it will cut $711 billion (mostly from Medicare).  Together, these deficit decreasing aspects of the law make for $1.28 trillion.  That means that even after spending $1.17 trillion, the federal government is expecting to make money on this deal.  The deficit reduction is still scored at the difference, $109 billion.

In January 2011, blogging Harvard economics professor Greg Mankiw wrote:

I have a plan to reduce the budget deficit.  The essence of the plan is the federal government writing me a check for $1 billion.  The plan will be financed by $3 billion of tax increases.  According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion.

This is in essence what ObamaCare does.  Not only that, but the timing of the tax increases (which started in 2010) gives the federal government more time to raise money before spending it like crazy in 2014 when the exchanges and Medicaid expansions are supposed to take place. 

As Carrie wrote this morning, we can only put so much stock in CBO numbers.  The CBO has to work with what Congress gives them, which often doesn't make sense.  And even then the scores rely heavily on assumptions that aren't always made clear to the public.

But even if we take the CBO numbers as given - $1.28 trillion goes in, $1.17 trillion comes out - we should think about how those resources are being allocated and what larger effect that will have on the health insurance market, the quality of health care that people receive, the choices in health spending that consumers make, and the private sector at large (which will lose $569 billion in taxes).  There's no way the government can tax and spend a trillion dollars worth of health care in a way that neatly delivers each person's treatments and services in the most efficient way. 

Here's a chart from today's report that summarizes the numbers:

 

 

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