After Health Care Reform, the Fiscal Deluge

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In the aftermath of the health care bill’s passage, the press has focused on the political contest going forward. Will President Obama and Congressional Democrats successfully sell the public on the merits of reform before November? How much will the issue dominate voter concerns this autumn? Will public outrage precipitate a change in control of either of the Houses of Congress?

These are all important questions, and they carry economic implications. But no one knows how the politics of health care reform will shake out. What we do know, however, is sobering: the passage of the health care bill has made repairing the federal government’s dire fiscal outlook immeasurably harder.

The health care bill’s advocates point to the finding by the Congressional Budget Office (CBO) that the health care legislation will reduce federal deficits. Yet at the same time, they fail to account for a number of complicating factors, such as a 21% cut in physician payments that proponents never intended to allow, undermining that very finding.

The proponents’ narrow focus on the CBO score misses a key point. Even if the best case scenario occurs and the bill as a whole reduces deficits, it will still have made our fiscal problems much worse than they were before. How can this be? A look at the salient budgetary facts provides the answer.

According to that same CBO, the federal budget is on an unsustainable course – a projection that assumed the adoption of the President’s health care policies. Deficits will total a disastrous $9.7 trillion over the next ten years. In 2018, well after the recession is over, we would have returned to annual deficits of more than $1 trillion, rising thereafter without limit. By 2020, debt held by the public would already be 90% of our Gross Domestic Product.

What can be done about this? Consider the options. The fastest growing part of the federal budget is health care. As we have written before, the President’s fiscal commission should have no choice but to look critically at all areas of health care spending – from Medicare to the new entitlement just passed – if it is to offer credible proposals to fixing the fiscal mess. But will Congress go along?

Consider us skeptical that Congress will be eager or even willing to seriously address health spending right after this massive bill has passed. Members of Congress currently being lambasted in town halls across the country are clearly desperate to move past the subject. Moreover, having just enacted hundreds of billions in Medicare cuts to fund a new entitlement, they are hardly poised to begin another round of cuts. Nor will those who voted “Aye” be stepping forward soon to say that they have overpromised and must scale back the new spending just enacted.

If restraining health care spending is off the table in the near term, what about raising taxes? Congress will be wary of choking off growth by dramatically hiking taxes on an economy still struggling to recover. Republicans, never eager to raise taxes, will hardly be willing to discuss the subject now that hundreds of billions in new tax revenues are being collected to fund a health care bill they opposed.

Where else can we turn? Social Security? It’s implausible to believe that a Congress and President who vastly expanded federal health care spending will turn around to significantly cut Social Security payments in the next few years. Medicare is, after all, the program where the elimination of inefficiencies could more readily be translated into deficit reduction, contrasting with the administratively efficient Social Security. In Social Security, no one can even pretend that beneficiaries will be left unaffected by spending constraints. In any case, given the bipartisan consensus against cutting benefits for those already in retirement, there simply is not much in aggregate savings to be realized from Social Security over the critical next decade.

In sum, the federal government’s recent enactment of politically painful Medicare cuts and tax increases – only to spend virtually all of the savings on a new health entitlement – has left no responsible fiscal path ahead. Even if the bill were to slightly reduce deficits as advertised (and we are highly skeptical that it will), the reckless choice to spend almost all of those projected savings on expanded coverage means that those same measures are no longer available to help avert a looming fiscal disaster. Simply put, it can’t be counted twice.

One of the most striking elements of the case made by health care reform proponents was their frequent suggestion that the bill was the next in a line of honored accomplishments that included the original establishment of Social Security and Medicare. Essentially, proponents equated each of these successive expansions of government with forward progress itself. If someone was skeptical of the fiscal prudence of the current health care bill, they were simply handicapped by the same conceptual limitations that blinded some foolish prior Americans to the greater good of Social Security and Medicare.

This model’s utter disregard of quantitative limits is a fascinating window into the “progressive” psyche. Today’s government expansion is good, we are told, because yesterday’s was good. There is no final destination for the ultimate cost of federal obligations. The progressive mindset is by this definition insatiable; it views the perpetual fight for government expansion itself as virtuous – or so their arguments would have us believe.

Unfortunately, fiscal realities show the limits of these historical analogies. When Social Security was enacted, federal spending was a mere 9% of GDP. When Medicare was enacted, federal spending was 17% of GDP, and many modern features of Social Security (COLAs and wage-indexing, to name but two) didn’t yet exist. Today, federal spending stands at a full 25% of GDP, deficits are at all-time highs, and the Social Security and Medicare benefits of the baby boomers have yet to fully hit taxpayers. Perhaps, just perhaps, expanding federal spending now isn’t quite the same thing as doing so in 1935.

Our Social Security and Medicare liabilities are much like an Adjustable Rate Mortgage (ARM) that the nation has taken out to buy an expensive house. We bought these programs years ago, but most of the biggest costs haven’t yet been felt. The payment rates on the mortgage are about to reset, climbing dramatically each year for the next two decades.

Health care proponents are essentially arguing that because I’ve already bought a house that I love, I should now go out and buy an expensive new car – even if I haven’t yet budgeted for my house payments. If the objection is raised that this is financially irresponsible, the retort is simply, “Hey, I’m paying fully for this car. And I just don’t trust you; you were never really committed to buying this wonderful house we all love in the first place.”

From a financial planning standpoint, such logic is lunacy. But even if there is no near-term fiscal correction, this year’s health care overreach must ultimately be followed by a future retrenchment. Indeed, if our national finances are to remain viable, there is no other choice.

We have seen this before – on Social Security. For decades, Social Security politics were glorious for Congressmen. Benefits were routinely expanded, usually in even-numbered election years. But ultimately there came the Social Security overreach of 1972.

In 1972, Social Security benefits were increased by 20%, COLAs were added, and an expensive new form of benefit-indexing was added to the program. The new benefits quickly proved unsustainable and also riddled with foolish technical oversights (sound familiar?). Congress had to enact a politically painful repair in 1977 – giving us the aggrieved “notch babies” – and another in 1983. Social Security specifically and the economy generally were major headaches for politicians throughout the 1970s.

And indeed from that time forward, any dabbling in Social Security has made difficult politics for elected officials. Henceforth, comprehensive Social Security reforms will probably never again occur except to scale back promises previously made.

Time will soon tell whether we have now reached a comparable point in health care. The numbers seem to indicate that we may have. From 1965 through 2010, politicians have entered into the health care fray principally to add new forms of benefits – first Medicare and Medicaid, more recently prescription drug benefits and the latest health care entitlement. And the message from the scorekeepers is now clear: from this point forward, our excessive promises must be dramatically scaled back.

A dramatic and painful retrenchment of federal health care spending is almost certain to happen some time in the future. It won’t happen as soon as it should, as Congress dodges the consequences of actions just taken. But within the next decade it will be time to pay the piper, and those who so recklessly added to the mounting cost of repair will have much to answer for.