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What Savings? Obamacare & the Deficit

by Christina Disomma / /

Poor Charlie Brown. Lucy’s snatched the football away again - except this time, the football is Obamacare’s “deficit savings” and the American taxpayer is the one knocked flat on the ground.

Obamacare was sold on the premise that it would reduce the deficit.  The Congressional Budget Office reported reductions of $130 billion in the first decade after passage, and $1.2 trillion in the second. President Obama even went so far as to say that the legislation was “the most significant effort to reduce the deficit since the Balanced Budget Act in the 1990s.”

Since the passage of the act, however, we’ve seen development after development completely disintegrate what many already viewed as misleading claims of budget relief.

As Reason.com noted, the bill was written to hide the costs beneath inflated “savings,” and higher insurance premiums and poor actuarial work would take their toll as well. The Heritage Foundation also tore the claims to pieces, pointing out that legislators ignored the expensive “doc fix,” and set the terms of several taxes and subsidies to falsely boost the idea of deficit reduction.

Now, after three years, the story of the “debt reducing” parts of the Affordable Care Act likely has the initial skeptics echoing Jurassic Park’s Ian Malcolm in saying, “Boy do I hate being right all the time.”

The most blatant attempt to cover “Obamacare’s” new spending was the CLASS Act. It offered, for what seemed like a reasonable premium, average long-term insurance benefits of at least $50 per day. Originally, the Congressional Budget Office (CBO) estimated that CLASS could cut the deficit by $70 million. Unfortunately, the program itself was unworkable from the get-go.

The CBO couldn’t even effectively measure the program, because no benefits were scheduled for distribution until at least five years after initial enrollment. CBO scores only cover the ten-year span after a law is enacted - so for the first half of the study, the “cost” of the program was effectively zero. Naturally, this bit of budget wonk-ery quickly caught up to the administrators of the program. As NTU noted, “an ‘insurance death spiral’ was inevitable – high premiums and a short vesting period would discourage all but the sickest Americans from signing up...this would drive premiums even higher, further discouraging the young, healthy people needed to keep costs manageable.”

The Department of Health and Human Services “realized” this before long as well, and CLASS was abandoned in October 2011 having done its main job of reducing the Affordable Care Acts CBO score.

The Employer Mandate is the most recent piece of “Obamacare’s” deficit reduction bundle to bite the dust. One of the most crucial financial supports of the Affordable Care Act, the mandate requires every employer with more than 50 employees to provide health insurance or pay a hefty penalty. A non-insurance providing company will owe $2,000 for each employee ineligible for low-income exchanges, and $3,000 for each employee eligible for the exchanges. The penalties are intended to fund the exchanges themselves, and tax credits for insurance purchase. However, the Obama administration recently delayed the mandate, extending the deadline for employer insurance coverage to 2015.

This is a budget-buster in more than one way: not only will the administration lose out on $10 billion in potential penalties in the upcoming year, but the infamous individual mandate was not tied to the employer one. This is creating an incentive for companies to dump employee insurance ahead of schedule, avoiding both the cost of health insurance and the first year’s fees. However, those unlucky employees will still be bound by the individual mandate, and many will likely be forced onto government exchanges. If Congress doesn’t act to delay the individual mandate as well, the costs could spiral much higher, both for the consumer and for Obamacare.

Finally, inefficient insurance exchanges threaten to chew up any “savings” created by other programs, and then some. Originally, wage and income data from the IRS was supposed to be used to determine eligibility for exchange subsidies. The problem is, the information needed didn’t (and still doesn’t) exist in a “real time” database. Such a collection of information would be costly and time-consuming to create, not to mention the requirements of keeping such a database secure.

Eventually, the administration admitted defeat, and announced that they would be offering subsidies based on self-reporting: basically, “the honor system.” Given the government can only impose penalties for fraud on your tax refund, the honor system is a particularly expensive way to conduct business. If you don’t collect a refund, no penalties will be imposed.

“Obamacare’s” supporters used “deficit reduction” as a major plank in arguing for passage of the law. As many critics predicted, though, in actual practice they’re limited by structural deficiency and an inability to respond efficiently to market forces. Now, the budget-busting reality of his health care reform boondoggle should be clear to all, but sometimes it seems only those paying the bills truly notice.