Why Obamacare Blows a Trillion Dollar Hole in the Budget

Today Doug Elmendorf, Director of the Congressional Budget Office, wrote a letter to John Boehner setting out the CBO’s current view of the budgetary impact of H.R. 2, the Republican-sponsored bill that would repeal Obamacare and related legislation. Elmendorf says that for the fiscal years 2012 through 2021, repealing Obamacare would reduce federal deficits by more than $1 trillion:

CBO and JCT [the staff of the Joint Committee on Taxation] estimate that the repeal of the provisions of PPACA [Obamacare] and the Reconciliation Act affecting health insurance coverage would result in a net decrease in federal deficits of $1,042 billion over fiscal years 2012 through 2021 (see Table 3). That estimate includes a $674 billion reduction in net federal outlays for Medicaid and CHIP and $677 billion in savings resulting from the elimination of the exchange subsidies and related spending. In addition, the repeal of the tax credit for certain small employers who offer health insurance is estimated to save $40 billion over 10 years. Those savings would be partly offset by lower revenues or higher costs, totaling about $350 billion over the 10-year budget window, from four sources: a decline in net revenues from eliminating the excise tax on high-premium insurance plans, totaling $111 billion; eliminating the penalty payments by uninsured individuals, which would reduce revenues by $27 billion; eliminating penalty payments by employers whose workers would receive subsidies via the exchanges, which would reduce revenues by $82 billion; and other budgetary effects, mostly on tax revenues, associated with shifts in the mix of taxable and nontaxable compensation resulting from changes in employment-based health insurance coverage, which would increase deficits by $130 billion.

It is critically important to understand that the CBO crunches numbers based on assumptions that it is given by Congress. The CBO does not comment on how plausible those assumptions are. Thus, garbage in/garbage out is the applicable rule.
Democrats are trumpeting the CBO’s finding that repealing Obamacare will increase deficits, not decrease them. How can this be? The explanation is that the Democrats have paired the new provisions of Obamacare with an alleged intention to make cuts in other areas, most notably Medicare. The Democrats claim that Medicare and other cuts will outweigh the $1 trillion tab for Obamacare. The problem is that there is not a single person on the planet who believes those Medicare cuts will ever happen. The Democrats ask CBO to assume that they will drastically reduce the compensation that doctors and hospitals receive for treating Medicare patients. But that won’t happen; the payments will be increased in separate legislation that is not part of the CBO’s analysis. Or, in the alternative, the Medicare program will collapse because no one will be willing to treat Medicare patients.
You can see the math in this table from Mr. Elmendorf’s letter. It shows how the $1 trillion savings that would accrue from repealing Obamacare are ostensibly outweighed by restoring the cuts in Medicare and other programs that, in fact, would never take place. Click to enlarge:
The Democrats are promising to make $1.2 trillion in future Medicare and Social Security cuts, to offset the $1 trillion additional costs that will be imposed by Obamacare. Whom are they kidding? The CBO has to accept the Democrats’ assumptions, but anyone else would be crazy to believe them.