No Gimmicks? Really?

In a blog yesterday and op-ed today, OMB Director Peter Orszag defended the President's health care plan as reducing "deficits by roughly $100 billion over the next ten years" without gimmicks. As he explains:

  • First, it’s true that loading savings up front and costs in later years is a time-honored budget gimmick.  It has a single purpose—to hide the ball and make programs look paid for in the near term that will in fact substantially add to the deficit over the long-term.
  • Second, it’s also true that some of savings under the health plan start sooner than the major costs in the legislation.  We can move quickly to begin identifying waste and improving quality in the current health care system, as well as make certain reforms to rebalance the tax code.  But, the major coverage expansion does not occur until 2014, in part because we need to take time to establish a system of state-based exchanges through which private insurance companies will provide quality insurance to those not getting it through their employer. Still, it is important to note that the vast majority of the savings in the next ten years occur in 2014 and thereafter.
  • Third, this is not a budget gimmick.  The purpose the tried-and-true gimmick described above is to make a proposal that adds to long-term deficits appear fiscally responsible. But if that were the course we were taking, we would expect to see a large fiscal hole at the end of the first decade and larger and larger deficits in the second decade. Instead, over the long-term, the savings under the President’s plan are expected to grow faster than the costs.  So, when the Congressional Budget Office is done with its scoring, we expect it will find that the President’s plan reduces deficits by roughly $100 billion in the first 10 years and roughly $1 trillion in the decade after that.  In other words, health reform should reduce the deficit by growing amounts over the long-term.

Put simply: Health reform will reduce the deficit in this decade, and it will reduce the deficit by even more thereafter.  There’s no gimmick in that.

This is correct, of course. There is nothing wrong with implementing different pieces of the bill as they become administratively feasible -- and the Senate bill (from which the President's plan will need to be at least deficit neutral) would technically reduce the deficit over ten years, in the tenth year, and beyond.

But that doesn't mean there are no gimmicks.

For one, Orszag claims the coverage portion of the bill doesn't begin until 2014 "because we need to take time to establish a system of state-based exchanges." Perhaps, but earlier versions of the bill started the coverage piece in January 2013. The start date was moved back twice, first to the middle of 2013 and then to January of 2014. The purpose of this was not to mask deficit impact of the bill as some critics claim, but rather mask the gross cost. Moving the start date allowed the coverage provisions to come in at $871 billion over ten years -- below the $900 billion threshold set by President Obama.

And the bill includes at least two other gimmicks (which we warn about here, and discuss in detail here).

The first is the inclusion of something called the CLASS Act. This long-term care insurance programs appears to reduce deficits over the first decade; but this is because of a five-year vesting period in which premiums are coming in, but benefits are not being paid. Eventually, all the revenue raised from the CLASS Act will be spent -- plus interest. And due to some design flaws, some experts believe it will need to seek new sources of revenue (or borrowing) to remain sustainable. (In fairness, the President has said that the CLASS Act would be made more sustainable under his plan -- although we have not seen all the details of this).

The second is the omission of something often referred to as the Doc Fix. Essentially, Medicare physician payment rates are scheduled for a 21 percent cut this year -- and has been subject to similar (but smaller) cuts in previous years. Although Congress has tended to deal with this with temporary patches on a year-by-year basis, the original version of the House health care reform bill included a permanent fix to this problem.

But offsetting the Doc Fix was expensive -- about $250 billion over ten years. And so Congress and the President have not only removed it from the broader health care reform bill, but have also exempted it from statutory pay-as-you-go laws --- so that it will never have to be paid for.

If we were to remove the phony savings from the CLASS Act, and add the real costs from the Doc Fix, we'd be looking at a bill which increases the deficit by $190 billion, rather than reducing it by $130 billion.


That's hardly gimmick-free deficit reduction.

Still, the bill will likely begin to reduce deficits in the second decade, even despite these gimmicks. By Washington standards, that's not half bad.