Orszag Hints that Health Care Reform Bill May Not Have Significant Long-Term Deficit-Reducing Effects After All

September 8, 2010

In his now famous New York Times piece on Tuesday, former OMB Director Peter Orszag made the following statement regarding why over the medium-term, spending isn’t the only way to solve the medium-term fiscal deficit problem and that revenues have to be part of the solution:

How much savings is plausible on the spending side? Medicare, Medicaid and Social Security will account for almost half of spending by 2015. Even if we reform Social Security, which we should, any plausible plan would phase in benefit changes to avoid harming current beneficiaries – and so would generate little savings over the next five years. The health reform act included substantial savings in Medicare and Medicaid, so there aren’t further big reductions available there in our time frame.

From a strict accounting perspective, the health care bill reduced the budget deficit. However, if what Orszag says is true, it’s possible that the health care bill didn’t really reduce the long-term budget deficit. That’s because the health care bill may have “used up” a source of funding in “Medicare savings” that would have otherwise been used to finance the medium and long-term budget problems facing the United States. In other words, instead of helping to solve the long-term budget problems of the U.S., this low-hanging fruit of Medicare cuts will be predominantly used to finance the higher health care spending (exchange subsidies and Medicaid expansion) enacted in PPACA.

Furthermore, if this crowding out is true, the end result from the health care bill is that the tax hikes eventually resulting from PPACA will be even larger than the bill explicitly outlines. That’s because eliminating this one spending cut option that was available for long-term fiscal solvency implies that the expected “tax increase” fraction of solving the long-term fiscal crisis became even higher.

Of course, if this higher health care spending on items like the exchange subisides and Medicaid expansion would have eventually happened anyway at some point, then it’s still the case that the health care bill did reduce the long-term budget deficit.


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