Apr 01 2010

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Obamacare: By the Numbers

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Obamacare and America

Oh the ironies that we write about Obamacare on April Fool’s Day.

But now that the bill has become a law, we can step back from the passions incited by breathtaking legislative malfeasance in the partisan passage of the bill, and layout the factual impact.

As anyone who has had the misfortune of seeing a car crash can tell you, the reality of the moment is defining in a way that the thousands of simulated crashes on our favorite TV programs can never match.

And so it is as Obamacare the bill becomes Obamacare the law.

The most fundamental point regarding Obamacare is that it establishes a behemoth, massive federal entitlement without substantively addressing the disintegrating public finances of the United States.

By way of context, consider that the US government ran a deficit of $484 billion in FY2008, and $1.4 trillion in FY 2009.  The Congressional Budget Office (CBO) estimates that the deficit for FY 2010 will be $1.5 trillion, dropping slightly to $1.3 trillion in FY 2011.

Long term, CBO estimates that under President Obama’s budget, debt held by the public would grow from $7.5 trillion (53% of GDP) in 2009 to $20.3 trillion (90% of GDP) in 2020.1Understand also that the CBO’s GDP forecast is an estimate as well. By way of comparison, a $20 trillion debt would be 142% of GDP today.

More ominous, according to CBO, the interest payments that the US government must make on this debt would quadruple from 1.4% of GDP in 2010 to 4.1% in 2020.2

To put that figure in context, in FY 2010, the US will spend 4.5% of GDP on national defense.

But instead of investing in the finest military on earth to protect the United States, or other sound and practical investments, interest on the national debt is “lost money”; simply transfer payment from US citizens to foreigners for the privilege of borrowing their money. It creates no value for the US.

And the 4.1% of our national output is only the interest on the debt, not the principal. Anyone who has gone wild with their credit cards knows the trap where they are so over leveraged that they can only make minimum monthly payments, exorbitant as they may be, as they are continually haunted by a mountain of debt.

This is the current and projected outlook on our public finances provided by the CBO.

What is frightening is that this outlook incorporates the fundamental assumptions of Obamacare that just became law.

In the 14 month run up to the vote on Obamacare, the gold standard for Democratic leaders was that the health care bill would be “deficit neutral.”

Sounds great, right? Congress being fiscally responsible.  And indeed, based on the conditions and stipulations set out by Congress, CBO estimated that Obamacare would lead to $138 billion in deficit reduction over 10 years.3

For anyone who looks at budgeting in linear fashion, this would appear to be an attempt to restrain government spending through health care reform, but that’s not the case.

Instead of using health care reform’s massive tax increases and spending cuts to lower America’s structural deficit – running over $1 trillion a year, the taxes and cuts are used to create a new entitlement on top of the existing deficit and accumulating debt, with $138 billion left over, if you accept the congressional assumptions provided to CBO on face value.

Specifically, Obamacare calls for tax increases that are estimated to generate $560 billion over a decade, and projected spending cuts to Medicare, and other health programs, totaling $520 billion in the same period.

If this was a deficit reduction package and not a new federal entitlement, the US would be well on the road to fiscal sanity (stipulating, as it were the debatable longer term impact of tax increases).

But it’s not a deficit reduction plan, or even part of one. These are budgetary carve outs that make virtually no impact on our overall fiscal condition.

So, accepting for a moment the gut-wrenching thought that trillion dollar deficits are going to continue as far as the eye can see, let’s at least hope that congressional assumptions on Obamacare are valid and credible.

But that’s not the case, either.

To keep Obamacare’s overall cost below $1 trillion for the first decade, Congress used unseemly gimmicks.

For starters, the program collects taxes for four years before it actually begins providing coverage for the remaining six.  The build-up of revenue on the front end allows budget scorers to disguise the actual cost of the program during the artificial ten year window. Once Obamacare is fully phased in, the real cost is not $900 billion, but $2.4 trillion over ten years.

Then there is the “doc fix.”

Under a 1997 law, Congress is due to approve a 21% cut in doctor reimbursements under Medicare. Congress has regularly ignored the provisions of the called-for cut, on the practical grounds that lower reimbursements would lead to few doctors participating in Medicare. But if the “doc cut” isn’t made, Congress will need to appropriate an additional $200 billion.

That didn’t make it into the estimates for Obamacare either.

OK, so we know what the Democrats have already left out of their projections, which significantly skew the costs. What cuts have they specifically called for? Among the highlights:

    • $156.6 billion in cuts to hospitals, nursing homes and Hospice.4
    • $200 billion in cuts to Medicare Advantage, which provide benefits through private insurers.5
    • $40 billion in cuts to home health care.6
    • $22.1 billion in reduced Medicare payments to hospitals that serve a large number of low income patients.7

Fairly aggressive, yes? But there are two challenges here; one immediate and one longer term.

The immediate problem is that the Democrats have double-counted the cuts. Democratic leaders have maintained the fiction that the cuts restore long term solvency to Medicare (that situation addressed below) as well as providing revenues for new health care spending.

As CBO pointed out, you cannot do both, and in fact, CBO has said that the majority of the savings under the Obamacare, “would be used to pay for other spending and therefore would not enhance the ability of the government to pay for future Medicare benefits.

Now why is that important?

The 2009 Trustees Report for Social Security and Medicare estimates that the Medicare solvency is in deep trouble.8 Specifically, the Hospital Insurance Trust (HI Trust) is expected to pay out more in benefits than it receives in taxes this year. Continuing deficits between benefits and taxes in the coming years will exhaust Medicare reserves in 6 ½ years, just as the largest class of the Baby Boomers is set for Medicare eligibility, creating a fiscal train wreck and a health care nightmare. By making cuts without honestly addressing long-term solvency, Congress threatens to destroy Medicare as a program.

Longer term, there is the question of whether future Congresses will have the political will to make the required cuts at all. History demonstrates a dubious track record here. And thatprospect creates additional fiscal pandemonium, where no savings are realized for the additional spending required under Obamacare or for Medicare’s long term solvency.

That’s the stuff of financial Armaggedon.

So if the spending cuts are unfortunately fungible, certainly the revenues from tax increases will be credible, yes?

    • $210 billion in additional revenue through a 0.9% surtax on earned income in excess of 200k for singles and 250k for couples, and a 3.8% surtax on investment income for taxpayers with gross incomes in excess of 200k for singles and 250k for couples.9
    • $52 billion in “penalty payments” by employers who do not provide health care for their employees.10
    • $20 billion in taxes on uninsured Americans; the “individual mandate or penalty” clause which has yet to stand up to constitutional muster.11
    • $20 billion in taxes on medical device manufacturers, through a 2.9% excise tax on the manufacture or importation of certain medical devices.12
    • $32 billion through 40% excise tax on health coverage in excess of 10k for individuals and 27.5k for families (beginning in 2018).13

The direct impact here is not so much on the expected revenue, as much as it is with regard to the impact of the tax increases on the private sector and economic growth.

The Medicare tax increase breaks significant new ground by moving beyond common income to tax unearned income, and to limit that increase to one segment of taxpayers; effectively one of the greatest wealth transfer schemes in modern American history.

The new tax will effectively raise the capital gains tax to 22.9% when the Bush capital gains tax cut expires at the end of 2010.  The top tax rate for dividends would increase to 42.5% after the Bush tax cuts expire at the end of the year.

The broader economic impact from this investment tax is stark, including some who believe the tax will depress GDP growth by as much as 1.3%14

With regard to the medical device tax, US manufacturer Medtronics stated that the tax could lead to the layoff of a thousand employees.15

Indeed, Caterpillar stated last week that Obamacare will cost the company $100 million more in the first year alone.16

Seizing on a change in the tax treatment of retiree prescription drug health benefits in Obamacare, Verizon stated that short term costs for health care will go up.

A modest tax incentive associated with the Bush Prescription Drug Benefit from 2003, which was designed to encourage employers to keep drug plans for retirees, was altered in the health care bill. Obamacare now taxes that benefit at the corporate income tax rate of 35%, creating $5.4 billion in revenue.17

But the impact of the revenue increase is adverse.

The change in tax treatment will have two potential and discouraging impacts.  First, higher costs will induce some companies to drop drug coverage, which could impact five million retirees and 3,500 businesses. Second, US accounting rules require businesses to immediately restate earnings in light of a hire tax burden on their long-term retiree health liabilities. That in turn, could have a significant impact on 2010 earnings.18

And as companies consider their benefit costs as a total package, to the extent permissible by contract, some companies may drop retiree coverage altogether. For those companies bound by labor contracts which restrict their ability to drop coverage, the only other alternatives is to cut coverage or raise premiums on active employees, or cut retirement health care provisions not subject to contract.19Further, the employer mandate is likely to have a distinctly negative impact on job creation. Small businesses, the engine of the American economy, will have to carefully assess hiring in light of health care coverage mandates and penalties.  Obamacare is actually an incentive for small business to intentionally not grow for fear of the impact of increased burdens for insurance or penalties.

So, by the facts, what do we have?

It is not overstating the case to say that the new health care law is a financial catastrophe for the United States in multiple ways.

The law does nothing to restructure our long term annual deficits and the exploding national debt.  Indeed, given the precariousness of the budget gimmicks, double counting, revenue and spending cut assumptions in the law, it is safe to assume that Obamacare will never be “deficit neutral” in the least, and in fact will add untold billions to our already unsustainable debt.

And to the extent that Obamacare does raise revenue, its methods are antithetical to private sector job creation and general economic growth that are fundamental and urgent with an economy still struggling to recover from recession.

Moreover, by singling out a certain segment of high income wage earners  to pay for the rest through the new Medicare tax, Democrats have fundamentally broken the social contract enshrined in Social Security and since, where everyone contributes to the benefits they receive.

It is a disaster.

And for anyone who does not believe this is a serious problem, consider that on March 15th, Moody’s Investors Service – the bond rating agency – published a paper warning that the exploding US government debt could cause a downgrade of US Treasury bonds.

Astonishingly, this would signal that for the first time since the Articles of Confederation governed America in the 1780s, that the US was a questionable credit risk.

And remember that 4.1% of national income dedicated to paying interest on the debt in 2020?  A downgrade in bond ratings would mean an increase in the interest rate required to sell that debt, with a cascade impact on the amount of the US budget needed to service the national debt.

Consider this direct quote from the Moody’s paper.

“Growth alone will not resolve an increasingly complicated debt equation,” Moody’s said. “Preserving debt affordability” — the ratio of interest payments to government revenue — “at levels consistent with Aaa ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion.”

Adjustments that will test social cohesion?

That’s not an April Fool’s joke.

Be afraid.  Be very, very afraid.

1. www.cbo.gov

2. Ibid

3. Ibid

4. CBO Letter to Speaker Pelosi 3-18-10, P.14

5. CBO Letter to Speaker Pelosi 3-18-10, P.13

6. Ibid

7. Ibid

8. www.socialsecurity.gov

9. Joint Committee on Taxation, 3-18-10

10. Ibid

11. Ibid

12. Ibid

13. Ibid

14. www.iret.org

15. www.wsj.com, “Obamacare Day One” 3-25-10

16. Ibid

17. Ibid

18. Ibid

19. Ibid

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