“What’s the $500 billion in cuts for? Preserving Medicare or funding the health-care law?”

—Rep. John Shimkus (R-Ill.), March 3, 2011


—Health and Human Services Secretary Kathleen Sebelius


Aha! The double-counting of Medicare funds for the new health care has been admitted by the Obama administration. At least that’s what Republicans claimed as the video clip above when viral on the Internet.

 On the face of it, Sebelius’ answer seems rather strange. As one web headline put it,  “Sebelius Cracks! Admits the Obamacare Books Were Cooked”

 But on another level, Sebelius is telling the truth, though somewhat inartfully. There is really nothing quite as nefarious about the process as some critics suggest, though one could argue that the process is wrong. A lot of this has to do with the strange and complicated way that the U.S. federal budget is calculated, so let’s take a trip through the numbers.

The Facts

 When President Bill Clinton signed the Balanced Budget Act of 1997, then House Speaker Newt Gingrich (R-Ga.) was one of the speakers. “On Medicare, we came together and we saved the system for at least a decade,” he declared. How could he make this claim? Through the same double-counting that Republican now decry.

The Fact Checker especially frowns on hypocrisy, and Republicans should acknowledge that they have gladly played this game before, including under President George W. Bush. Even a reformed gambling addict has to admit he once had a gambling problem.

 But, on the other hand, a strong case can be made that there is no double-counting going on at all. It’s simply a case of looking at the same money at different ways. In other words, it is not double counting, but counting different things.

 You may have $1,000 on deposit at a bank. Those are certainly your assets, but the bank looks at that money differently: money to make more loans. It’s the same $1,000 but it is counted differently on your books and the bank’s books.

 A similar thing is going on here. The health care law reduced predicted expenditures for Medicare by nearly $500 billion, resulting in budgetary savings that the law uses to help pay for the health care changes. That’s the money in the bank; it means the U.S. government will not need to set aside as many Treasury securities to fund Medicare.

 Meanwhile, because Medicare spending has been reduced, the solvency of Medicare has been extended. That’s the other side of the ledger—the bank’s view, so to speak. The accounting for Medicare solvency is a different matter than the current spending in the budget, though it has implications for the long-term budget health.

 Here’s how the Balanced Budget Act of 1997 was described at the time: “Along with saving $247 billion over five years, the Act also extended the solvency of Medicare’s trust fund for at least 10 years.”  You can argue about how this extra money is spent—the Balanced Budget Act of 1997 spent it on tax cuts and a children’s health plan—but in theory there was more money in the bank. (Footnote: some of the Medicare cuts in the 1997 act turned out to be so onerous they were pared back or not implemented.)

 Just because both parties have done this sort of accounting, a case certainly can be made that any real Medicare savings should be set aside—in a “lockbox,” as former vice president Al Gore famously put it.

 In fact, just because Medicare solvency has been extended, if the money saved on Medicare is used for other purposes, the long-term financial health of the government does not necessarily improve. That’s because, in the words of the Congressional Budget Office, it “would not enhance the ability of the government to redeem the bonds credited to the trust fund to pay for future Medicare benefits.” Indeed, under the health care law, the nation’s gross public debt increases, though analysts disagree on the importance of that fact.

  Some argue that the increase in the gross debt is evidence of double-counting but the CBO has said that focusing on the health care law’s impact on the gross debt is not very illuminating: “That measure of debt conveys little information about the federal government’s future financial burdens and has little economic meaning.”

 In any case, it is a fiction that the Medicare trust fund (and the Social Security trust fund) simply holds “worthless IOUs.” IOU is just another way of saying bond. These bonds are backed by the full faith and credit of the U.S. government. No president or Congress would risk defaulting on these bonds because it would ruin the nation's financial standing.

 The bonds are a real asset to Social Security and Medicare, but they also represent an obligation by the rest of the government. Like any entity that issues debt, such as a corporation, the government will have to make good on its obligations, generally by taking the money out of revenue, reducing expenses or issuing new debt.


The Pinnochio Test

 Sebelius is correct when she says the same savings is doing two things at once. Whether this is double-counting is in the eye of the beholder, but under the accounting rules that both parties have used for decades, this is considered an acceptable practice. As the debate on entitlements heats up, and new savings in Medicare are identified, the real question should be how those savings are applied, not whether the accounting is bogus.

 Two Pinnochios to Republicans who keep flogging this issue without acknowledging their own past complicity.

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