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Is the health care law already running a deficit?

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Sen. Ron Johnson (R-Wisc.): “The original estimate for deficit reduction in the first 10 years was $143 billion, correct?”

HHS Secretary Kathleen Sebelius: “Yes–”

Johnson: “So now we, we’ve reduced that $143 billion by $86 billion – by not getting revenue from the CLASS Act – and now $111 billion because we’ve increased the mandatory costs of the exchanges, correct?”

Sebelius: “I’m assuming the numbers are correct.  I’m sorry I don’t have them.”

Johnson: “So, when you add those together, that’s $197 billion added to the first 10-year cost estimate of Obamacare, so now we are instead of saving $143 billion, we are adding $54 billion to our deficit, correct?”

Sebelius: “Sir, I –”

Johnson: “We’ll submit that to the record. But, that’s basically true.  So instead of saving $143 billion, by this administration’s own figures and budget, we’re now adding $54 billion to our deficit in the first 10 years.”

— Exchange during congressional hearing, March 7, 2012

A reader asked us to fact-check these claims by Sen. Johnson, a trained accountant who won election in part on clever ads that played up his experience in the real world of budget numbers. (See ad at bottom of the column.)

 Secretary Sebelius certainly appears to be a bit clueless as Johnson tosses a bunch of numbers at her, clearly trying to show that the Obama health care law is now projected to show a deficit. But he gets his own facts and figures mixed up, as we will demonstrate.

 To the senator’s credit, he called us directly to talk through these numbers and conceded that some may not add up.

 “I am not hung up in the math here,” he said, saying that his larger point is that “previous estimates of entitlements have been wildly underestimated.” He cited, as an example, a McKinsey Quarterly study concluding that the Congressional Budget Office vastly underestimated how many employers will stop offering insurance as a result of the health care law, which has the potential to increase the cost of the law.

  “It is the large numbers, not the small numbers” that are important, Johnson said, and it “is my job to press administration officials” for more information. He noted that Sebelius said she assumed the numbers he used were correct. (Note to Secretary Sebelius: Don’t assume the numbers are correct when you aren’t really sure.)


The Facts

 When the health care law was passed, the Congressional Budget Office estimated that it would reduce the deficit by $143 billion over ten years. That number has been controversial ever since the estimate was released, and we certainly acknowledge it should be accepted with a large caveat. Such ten-year figures are subject to change, and depend greatly on assumptions that may or may not be sound.

Lawmakers on both sides of the aisle certainly should have a great deal of humility about predicting the long-term consequences of their actions. We have embedded below a long-forgotten opinion article, written by former Lyndon Johnson aide Joseph A.Califano Jr., explaining some of the mistaken assumptions that led to the explosive — and budget-busting — growth of nursing home care in Medicaid.

Califano’s article may be 19 years old, but it is one of our favorite examples of good intentions gone awry. We actually wish it were framed on the wall of every lawmaker’s office. As he put it, “we got into much of the current mess by acting on the best of intentions without foreseeing the worst of unintended effects.”

<a title=”View Article on birth of Medicaid by Joseph Califano on Scribd” href=”” style=”margin: 12px auto 6px auto; font-family: Helvetica,Arial,Sans-serif; font-style: normal; font-variant: normal; font-weight: normal; font-size: 14px; line-height: normal; font-size-adjust: none; font-stretch: normal; -x-system-font: none; display: block; text-decoration: underline;”>Article on birth of Medicaid by Joseph Califano</a><iframe class=”scribd_iframe_embed” src=”” data-auto-height=”true” data-aspect-ratio=”0.772727272727273” scrolling=”no” id=”doc_88706” width=”100%” height=”600” frameborder=”0”></iframe>

Thus it is certainly important for Congress and administrations to keep track of costs in the health care law and fix problems as they emerge.

But Johnson made a mistake in trying to update a two-year-old estimate with a few new numbers, rather than start afresh. He also mixed up different time frames and estimates by the Congressional Budget Office and the Office of Management and Budget.

 The $143 billion deficit-reduction estimate was for the 2010-2019 time frame. Johnson then subtracts $86 billion because the administration canceled a long-term-care program known as the CLASS Act, leaving just $57 billion in deficit reduction. But his math is wrong because the $86-billion figure comes from an estimate with a different time frame (2012-2021)

 Comparing apples to apples (ie, the 2012-2021 time frame), Johnson needed to subtract  the $86 billion from a ten-year deficit-reduction estimate of $210 billion, leaving $124 billion in deficit reduction.

 (In an email, Johnson spokesman Brian Faughnan suggested it would be best to focus on the 2014-2021 period, when the health care law begins to be fully implemented. With the elimination of the CLASS Act, this would leave $68 billion in deficit reduction in that time period.)

 As Johnson suggested, perhaps these are minor math issues. He said he focused on “well-known numbers” when he questioned Sebilius.

 But Johnson compounds his mistake by bringing up the $111-billion figure, “because we’ve increased the mandatory costs of the exchanges.” (He is referring to tax credits that will be given to eligible Americans who need assistance to purchase health insurance offered through exchanges.) 

 First of all, that $111-billion figure comes from the White House Office of Management and Budget calculations, which are often different than CBO estimates. It’s kind of like using Spanish words to speak French; the meanings may not be the same.

 Second,  Johnson is only counting the cost side of the equation, while ignoring new cost savings.

 About half of the $111-billion increase — $55 billion — comes from legislation passed last year to reduce the number of people who would qualify for Medicaid under the law, according to OMB officials. But because of that law, another $77 billion would be saved in Medicaid spending elsewhere on the budget ledger. On the surface, that would leave a net gain of $20 billion.

The actual interaction would not work quite that neatly, but the key point is that Johnson is only looking at one side of the budget. (The CBO calculates the numbers differently but still comes up with about a $20 billion net gain.)

So Johnson should be crediting $20 billion in deficit reduction, not subtracting $111 billion. (The remaining $56 billion increase comes from technical changes made by the Treasury Department in its revenue model, which actually might bring its numbers a bit closer to CBO estimates. In the past, OMB has calculated the tax credit costs lower than CBO.)


The Pinocchio Test

 We fully concede that, in the context of ten years of budgets, some of these numbers are rounding errors. But just as it was silly for Democrats to claim the health care law would reduce the deficit, it is a fool’s errand for Republicans to keep trying to prove it does not.

 The CBO figure from two years ago was only an estimate, and already some of its assumptions look shaky (i.e., 4.8 percent unemployment rate in 2014.) But you can’t pick and choose numbers, as Johnson did, to make your case. He managed to mix up time frames and then looked at only one side of the ledger.

 Still, Johnson’s main goal—to keep track of the course of the health care bill and monitor whether estimates are veering off track—is to be applauded. Califano’s warnings from 1993 are certainly worth keeping in mind today as the health care law begins to take effect. But in the future Johnson should be careful to keep his facts and numbers straight—just as administration officials should be prepared to answer his questions.  

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