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In the Nation's Interest

The Budget (and “Obamacare”) Update

By Joseph Minarik

You probably have recognized that the big Washington news of this week was the usually routine annual revision of the economic and budget outlook by the nonpartisan Congressional Budget Office (CBO).  Within that document, the big news was the re-estimate of the budgetary effects of the Affordable Care Act (ACA, or “Obamacare”), and the re-assessment of its effect on the economy in general and the labor market in particular.  The political class has been screeching back and forth hysterically ever since the release.

For example, the Wall Street Journal editorialized that the CBO is “full of liberal-leaning economists.”  Given CBO’s call-‘em-as-I-see-‘em assessment of the ACA, it is a little hard to see where the Journal’s editorial board is coming from – unless they think that by impugning the CBO’s integrity, they can count double what they like in the conclusions.

As you may know, CED stated back in 2010 that, on balance, the correct vote on final passage of the ACA was “no.”  We had our own vision of healthcare reform, and though the ACA contains elements of our vision, those elements are not fully exploited and are implemented poorly.  So what follows will not be a friendly view of the bill.

However, now that the ACA is the law of the land, just saying “no” is not constructive.    The CBO’s numbers are full of subtlety and nuance, and so all of the screeching is a lot less useful than would be some sober analysis.

To start with a little background:  It is highly unusual that now, four years after the enactment of the ACA, the CBO is re-assessing its scoring of the bill.  In fact, I cannot recall this ever being done.  There was no second opinion on the budget effects of the 1993 Clinton deficit-reduction program, or of the 2001 tax cuts of President Bush.  The assessment upon the enactment of those bills stood for all time, and thereafter the numbers were just rolled into the budget baseline.

The ACA lends itself to continued reassessment largely because so many of its components were not mere modifications of pre-existing law, but rather totally new programs that are so large that they constitute virtual line items in any meaningful presentation of the budget.  If you re-estimate and present their cost (or savings), you have for all practical purposes re-estimated and presented the net budget effect of the entire bill.  Hence, for good or ill, we re-litigate the bill every time we look afresh at the budget as a whole.

In fact, this time around, the estimate of the net budgetary cost of the ACA has been remarkably stable.  At least one journalistic presentation made the elementary error of comparing the ten-year estimated cost of the bill last year and the ten-year estimated cost of the bill this year, but looking at a different ten years.  Because the provisions of the bill are phased in, and because of general inflation and population growth, a later ten-year budget window inevitably will show bigger numbers than an earlier one.  Therefore, any claims that this year’s cost numbers are much higher than last year’s are simply wrong.

In fact, over the ten-year period 2014-2023, the CBO’s estimate of the cumulative cost of the coverage-expansion provisions of the ACA, estimated today, is $9 billion lower than was their estimate for the same 2014-2023 window as of last May.  Given the total cost of those provisions, this is a reduction of under 1 percent – not a huge windfall, but better than the alternative.

Now, this is an enormous and complex bill.  That small change is a net of a large number of puts and takes.  And some of the reasons for declines in the cost are less than encouraging.  For example, the ACA’s rocky rollout has reduced health-insurance enrollments, and fewer enrollments means less in subsidy payouts, which means lower cost.  It is good to save money, but not at the expense of the objective of the bill.  On the other hand, another reason for lower total projected cost is that private insurers’ premiums are coming in at about 15 percent below the forecast.  Good news – but will the premiums remain low given that enrollments also are low, and that the mix of those enrollments between (if you will) more-or-less randomly selected people, and people who already are sick and will be costly to cover, is an open question?  Stay tuned.

The number of enrollments is lower than projected in both of the ACA’s two major vehicles by which people would obtain coverage: the expansion of the pre-existing Medicaid program, and the new health-insurance exchanges.  In 2014, CBO now projects that six million people will receive coverage through the exchanges; as of last year, that estimate was seven million.  Under Medicaid, CBO now estimates that eight million people will gain coverage this year; as of last year, that estimate was nine million.  CBO says that experience to date provides no basis to change their prior estimates of future enrollment under either program, and they confess that there could be a catch-up from the lost ground of 2013 and 2014, or there could be a continued lag.  No revelations here.

By the way, there is some caution in CBO’s enrollment estimates for those who have argued that a pure government-run single-payer system could achieve true universal health-insurance coverage, and that no other system would do so.  (I have heard some criticism of CED’s vision of market-based universal health insurance on this ground, even though we propose a credit for all equal to the cost of a private insurance policy.)  CBO anticipates that five million people will not show up to accept cost-free enrollment in Medicaid.  There is no reason to expect that a “Medicare-for-all” system would achieve any different outcome, and common sense suggests that many people will wait to claim cost-free coverage under any system until they become sick.

CBO’s basic cost and enrollment re-estimates are noteworthy, but probably fall somewhere south of earth-shattering.  All of the attention, rather, has focused on CBO’s re-evaluation of the effect of the ACA on the labor market.  Not to overdo the tedious economist-speak, but terminology is important:  CBO estimates that a small subset of the population, having been given a new and less-costly opportunity to obtain health-insurance coverage, will therefore choose to work less than they would otherwise.  The people who will be affected by the law and who may change their behavior will be mostly persons with low incomes who will receive subsidies in the insurance exchanges or will become eligible for Medicaid, and to a much lesser degree people with very high earnings or investment incomes who will be required to pay greater payroll taxes.  The total reduction in work effort would be equivalent to about 1 percent of total labor earnings in the economy; CBO’s previous estimate on this effect was only half that.

Taking into account that most of the affected persons would earn low wages, CBO calculates that this reduction in labor effort would be the equivalent of 2.0 million full-time worker-years (or 1.5 percent of total worker-hours) in 2017, rising to 2.5 million full-time worker-years (or 2.0 percent of total worker-hours) in 2024.  Again, these changes are derived from the direct estimate of the reduction in earnings; they are not calculated independently.  And CBO does not separately estimate this reduction in labor hours or years for people who withdraw totally from the labor force (such as, say, a 63-year-old person who had worked mainly to obtain needed employer-provided health-insurance coverage, and who with newly available coverage under Medicaid or through an exchange might choose to retire), versus those who would continue working but reduce their desired hours (such as someone who would switch to a part-time job once Medicaid or exchange-based coverage was available).

In terms of economic performance, this change in desired labor-force participation would have little consequence in the near term.  With a veritable army of unemployed and other persons who would seek work if jobs were available, any cutbacks of hours by those now employed would easily be made up by others who want work.  However, once the economy reaches full utilization, such reductions of desired work hours would come off the top and reduce potential output (that is, potential GDP).  Thus, CBO finds that the economy will produce less once we get several years down the road, which has an adverse impact on the budget (more on that little detail later).

I have enormous respect for CBO (full disclosure: I once worked there), and all of the work that obviously has gone into these estimates.  And again, anyone who has accused that institution of political bias (that is, favoring the party currently in the White House and its signature health-insurance law) should be red-faced with shame upon reading this analysis.  However, I have to say, at least on the basis of one day of reading and thought, that this story may be as much over-sold as it clearly has been over-bought.  I don’t believe that I would have gone so far in increasing CBO’s original estimate of the effect of the ACA on the labor market.

For starters:  Estimating household labor-force behavior in even the most straight-forward circumstances is extraordinarily difficult.  Just accounting for the differing opportunities of the two spouses (in such instances) and the needs for and availability of child care are tricky enough.  Identifying the separate and independent effects of the worker’s skill and the opportunities in the labor market is difficult.  Then applying any such findings to an unusual labor market – such as this one, in the still-turgid wake of the worst economic downturn in the history of reasonably accurate data – would be even harder.

But that is just the beginning of this exercise.  The question here is how people will change their labor-force participation when presented with non-employment-based options for obtaining health insurance.  Even the theory, much less the empirical research, in this area is far from straightforward.  There are two basic avenues for an impact.  First, if you give insurance (or a premium subsidy) to an individual but then phase it out as wages rise, that person would have less reason to seek higher wages.  That part is straightforward enough.  But the second avenue, according to CBO as well as everyday economic theory in more-conventional circumstances, is that giving money to someone makes additional work less necessary.  CBO reasons that health insurance is like money, and so giving it to potential workers will lead them to work less.

Well, is health insurance like money?  That is a really fuzzy question, especially thinking about low-income people who otherwise might not have coverage.  If you get insurance and therefore go to the doctor about what had been an untreated nagging problem, are you richer?  Better off, certainly – but not in monetary terms.  Likewise, if you receive catastrophic coverage and therefore needn’t worry about a bankrupting medical bill – which you could not possibly have paid anyway – are you richer?  You cannot spend peace of mind at the grocery store.  Personally, I am really uneasy about the notion of such an “income effect” (as we economists call it) reducing the labor effort of persons newly insured – not knowing precisely what CBO might have done to discount this avenue of impact on workforce behavior.  Health insurance is not “fungible” – it cannot be exchanged for money, or even borrowed against to provide cash to buy other things.  (Admittedly, in some instances insurance will cover an expense that the beneficiary would have incurred anyway, and therefore will save cash income.  But how common such instances are relative to other peace-of-mind benefits from insurance is unclear, as is whether people will be influenced to work less today by the possibility of such instances occurring in the future.)

CBO relies on several recent academic papers to derive their new estimates.  The one paper that seems to push in the direction of a large reduction of work effort from the availability of health insurance is based on Tennessee’s 2005 dropping of Medicaid (called TennCare) coverage for 170,000 of its residents.  (The paper calls this a “reform” – for which I would impose a 15-yard penalty for unnecessary roughness on the English language.)  The authors find that those who lost insurance coverage, in comparison to others (in Tennessee or elsewhere) who did not, significantly increased their work effort – apparently to re-acquire coverage through other employment.  Thus, this natural experiment was the inverse of the CBO proposition that those who gain coverage will decrease their work effort.

This is a fascinating piece of research which should bear a lot of thought.  It does raise one fundamental question:  Would the effect observed in Tennessee – of the loss of coverage apparently motivating additional labor supply – work in reverse, when coverage is gained rather than lost?

But in this precise context, there are some more troubling questions:  CBO in fact says that it projects little impact on labor supply from the ACA’s changes in the Medicaid program.  This is because there already are many people who would face these same motivations from the prospect of losing Medicaid coverage; the ACA’s changes to a considerable degree merely shift those motivations from one group to another (by raising the income threshold at which people lose Medicaid), and then partially compensate for that effect by making coverage available through the exchanges for those who do raise their incomes beyond Medicaid’s upper limit.  (An exception, but still partially compensated for by the availability of exchange coverage, is extending Medicaid eligibility to childless adults.)  Where CBO projects most of its reduction in labor supply is among people eligible for the exchanges, not Medicaid.  And the research on Tennessee is not directly pertinent to the behavior of people newly eligible for exchange coverage.  That gets back, quite possibly, to the very hazy theoretical question about the “income effect” of giving people coverage through the exchange.

In sum, the CBO is reaching to the frontiers of our economic knowledge – and quite possibly beyond – in its estimates of the labor-force impact of the ACA.  It is troubling that Washington is investing so much substantive energy and emotional angst in a matter subject to such enormous uncertainty.  It will be more troubling if people make consequential and perhaps irreversible decisions on such shaky grounds.

As one possible example of such a potentially errant course, Washington and the financial markets now await resolution of the impending re-imposition of the federal government’s statutory debt limit (tomorrow, in fact).  Taking the Treasury even near an exhaustion of its cash balances would raise anxiety levels throughout the economy – just what the nation does not need at this time.  If opponents of the ACA – whether they be considered right or wrong on substantive grounds – were to decide to use the debt limit as leverage to achieve a change in healthcare policy, and a standoff with the Administration should ensue, the consequences could be disastrous.

But again, CED believes that the design of the ACA brings on a number of ill effects.  The issues raised in the CBO report arise to some degree from the separate treatment of persons under Medicaid, versus under the exchanges, versus under employer-provided coverage; with different treatment of Medicaid in different states (this the result of the Supreme Court decision); and with income-based phaseouts of eligibility and subsidies, including notch effects (for example, where one dollar of additional income can end eligibility for Medicaid, or can decrease the subsidy for coverage under an exchange by hundreds of dollars for households with quite modest incomes).

And oh – By the way, CBO also provided new estimates of the budget deficits and debt going forward, which usually is the headline from this annual exercise.  And apart from the estimate for 2014, the projected deficits are larger, and the projected debt is correspondingly higher.  By 2023, the debt is projected to be greater than the previous estimate by a little more than $1 trillion.

So after spending these moments of our precious youth worrying over the intricacies and detailed effects of the largest change in healthcare policy in generations, we now find that the outlook for the nation’s finances is both worse and ultimately unsustainable – almost solely because of the cost of health care.  We believe that CED’s vision for the U.S. healthcare system is far superior, and we commend it to your consideration.  The nation must address health care and the budget at some point, and as exhausted as our policymaking apparatus may be at this moment, the sooner, the better.