CBO Director Dr. Douglas Elmendorf has posted the slides he used in a presentation Wednesday to the Institute of Medicine, titled “Health Costs and the Federal Budget.”  The presentation obliterates the claims of the President and his allies about the effects of the new laws on federal health spending and the budget.

For months the President and his Budget Director correctly argued that the goal of health care reform was to “bend the cost curve down.”  The projected path of per capita health spending is unsustainable and will result in three bad outcomes:

1. those with health insurance will have less money available for other needs;
2. it will be harder for the uninsured to buy insurance; and
3. government spending on Medicare and Medicaid will break federal and state budgets.

Here is the President at the Blair House:

The third thing it seems — I assume we can all agree on is that over the last decade costs have doubled for health care in America — costs have doubled for government-provided health care, but everybody’s health care.  And that that meant that right now everybody knows that that wrecks budgets, it wrecks state budget, it wrecks family budgets, it wrecks federal budgets.  Every 35 cents of every dollar spent on health care is spent by the federal government or the state governments for Medicare and Medicaid — 35 cents on the dollar.  That doesn’t count veterans and other things, just those two.  And so — and what’s happened is — on the dollar, on every health care dollar.

And so we’re facing, all of us around this table, Democrat and Republicans, are facing the fact that there’s $919 billion now we’re spending on Medicare and the federal portion of Medicaid, and that if things — I don’t see any firewall is going to keep costs from doubling again, we’re going to be talking about in the year 2019 we’re going to be spending $1.7 trillion if we don’t do something to bend that curve.

A common refrain from the President and his Budget Director was “health care reform is entitlement reform.”  And through two budget cycles, when senior Administration officials were pressed on their plans for deficit reduction, they always returned to the argument that health care reform would substantially improve the federal budget outlook.

CBO Director Dr. Douglas Elmendorf has shown this argument to be incorrect.

This is the best and most direct presentation I have seen on the subject.  I commend Dr. Elmendorf for his honesty, clarity and bluntness.  I wish he had been this blunt and this clear in February and March before these bills became law.

Here is Dr. Elmendorf’s first slide.  Emphasis is mine.

The Challenge

Rising health costs will put tremendous pressure on the federal budget during the next few decades and beyond.  In CBO’s judgment, the health legislation enacted earlier this year does not substantially diminish that pressure.

Here he shows the effects on Medicare spending of the two new health care laws, as well as the effect if Congress permanently extends a Medicare “doctors’ fix” like the “temporary” one being considered in the House today.  The light blue line represents Medicare spending before the new laws, the dark blue line after the new laws, and the dotted line is the new laws plus a permanent doc fix.  You can see that there is net Medicare savings even with a permanent doc fix, but the unsustainable spending growth still exists.  And this is the part of the federal government where they “cut” (slowed the growth of) spending to pay for part of the new health care subsidies.

Now Dr. Elmendorf shows us the effects of the new laws on spending for Medicaid, CHIP, and the new health insurance subsidies  You can see how the new spending line (in light blue) is an enormous increase over the baseline spending in dark blue.

OK, now let’s examine the net effects of the two laws.

Since the dark blue bars are roughly the same height as the combination of the light blue bars, the net deficit effect shown by the line is right about zero.  Congressional Democratic leaders optimized to maximize coverage and minimize political pain from spending cuts and tax increases without increasing the deficit.  Had they instead focused on the the President’s stated priority of “bending the cost curve down,” this graph would have looked quite different.  The deficit reduction boasted about by the Administration and its allies is trivially small.

Dr. Elmendorf is direct:

The legislation will increase [the federal budgetary commitment to health care] by nearly $400 B during the 2010-2019 period but reduce it in the following decade.

The legislation will reduce budget deficits by about $140 billion during the 2010-2019 period and by an amount in a broad range around one-half percent of GDP during the following decade.

Q:  How can both these statements be true?  Over the next decade, how can the new laws increase the federal budgetary commitment to health care while reducing the deficit?

A:  By redirecting non-health dollars to health.  The increased Medicare payroll taxes on “the rich” are the best example.  These laws devote more federal resources to health care.  We were supposed to move the other way and devote less.

On February 23, 2009, the President said:

In the coming years, we’ll be forced to make more tough choices and do much more to address our long-term challenges, from the rising cost of health care that Peter described, which is the single most pressing fiscal challenge we face by far, to the long-term solvency of Social Security.

Once again Dr. Elmendorf debunks this claim that “it’s all about health cost growth.”  This graph shows that, at least for the next decade, most of the growth in federal entitlement spending is the result of aging.  Excess cost growth of health spending is a critically important but secondary factor.

Finally, here is Dr. Elmendorf’s concluding slide.  Emphasis again is mine.

Putting the federal budget on a sustainable path would almost certainly require a significant reduction in the growth of federal health spending relative to current law (including this year’s health legislation).

Never before have I seen a CBO Director so bluntly refute the policy claims of a President and his Budget Director.

The Obama administration continues to insist (see this post from White House budget director Peter Orszag) that the recently enacted health-care law will reduce the federal budget deficit by $100 billion over ten years and by ten times that amount in the second decade of implementation. They cite the Congressional Budget Office’s cost estimate for the final legislation to back their claims.

And it is undeniably true that CBO says the legislation, as written, would reduce the federal budget deficit by $124 billion over ten years from the health-related provisions of the new law.

But that’s not whole story about Obamacare’s budgetary implications — not by a long shot.

For starters, CBO is not the only game in town. In the executive branch, the chief actuary of the Medicare program is supposed to provide the official health-care cost projections for the administration — at least he always has in the past. His cost estimate for the new health law differs in important ways from the one provided by CBO and calls into question every major contention the administration has advanced about the bill. The president says the legislation will slow the pace of rising costs; the actuary says it won’t. The president says people will get to keep their job-based plans if they want to; the actuary says 14 million people will lose their employer coverage, many of whom would certainly rather keep it than switch into an untested program. The president says the new law will improve the budget outlook; in so many words, the chief actuary says, don’t bet on it.

All of this helps explain why the president of the United States would be so sensitive about the release of the actuary’s official report that he would dispatch political subordinates to undermine it with the media.

It’s not the chief actuary’s assignment to provide estimates of non-Medicare-related tax provisions, so his cost projections for Obamacare do not capture all of the needed budget data to estimate the full impact on the budget deficit. But it’s possible to back into such a figure by using the Joint Tax Committee’s estimates for the tax provisions missing from the chief actuary’s report. When that is done, $50 billion of deficit reduction found in the CBO report is wiped out.

And that’s before the other gimmicks, double counting, and hidden costs are exposed and removed from the accounting, too.

For instance, this week House and Senate Democratic leaders are rushing to approve a massive, budget-busting, tax-and-spending bill. Among its many provisions is a three-year Medicare “doc fix,” which will effectively undo the scheduled 21 percent cut in Medicare physician fees set to go into effect in June. CBO says this version of the “doc fix” would add $65 billion to the budget deficit over ten years. The entire bill would pile another $134 billion onto the national debt over the next decade.

If the Obama administration gets its way, this three-year physician-fee fix will eventually get extended again, and also without offsets. Over a full ten-year period, an unfinanced “doc fix” would add $250 to $400 billion to the budget deficit, depending on design and who is doing the cost projection (CBO or the actuary).

Administration officials and their outside enthusiasts (see here) say the Democratic Congress shouldn’t have to find offsets for the “doc fix” because everybody knows a fix needs to be enacted and therefore should go into the baseline. (By the way, the history of the sustainable growth rate [SGR] that Ezra Klein provides at the link above is a misleading one. The SGR was a replacement for a predecessor program that too had run off the rails — the so-called “Volume Performance Standard” enacted by a Democratic Congress in 1989.)

But supporting a “doc fix” is not the same as supporting an unfinanced one on a long-term or permanent basis. Not everybody in Congress is for running up more debt to pay for a permanent repeal of the scheduled fee cuts, which is why such a repeal has never been passed before. In the main, the previous administration and Congresses worked to find ways to prevent Medicare fee cuts while finding offsets to pay for it.

But that’s not the policy of the Obama administration. The truth is the president and his allies in Congress worked overtime to pull together every Medicare cut they could find — nearly $500 billion in all over ten years — and put them into the health law to pay for the massive entitlement expansion they so coveted. They could have used those cuts to pay for the “doc fix” if they had wanted to, as well as for a slightly less expansive health program. But that’s not what they did. That wasn’t their priority. They chose instead to break their agenda into multiple bills, and “pay for” the massive health entitlement (on paper) while claiming they shouldn’t have to find offsets for the “doc fix.” But it doesn’t matter to taxpayers if they enact their agenda in one, two, or ten pieces of legislation. The total cost is still the same. All of the supposed deficit reduction now claimed from the health-care law is more than wiped out by the Democrats’ insistent march to borrow and spend for Medicare physician fees.

And the games don’t end there. CBO’s cost estimate assumes $70 billion in deficit reduction from the so-called “CLASS Act.” This is the new voluntary long-term-care insurance program that hitched a ride on Obamacare because it too created the illusion of deficit reduction. People who sign up for the insurance must pay premiums for at least five years before they are eligible to draw benefits. By definition, then, at start-up and for several years thereafter, there will be a surplus in the program as new entrants pay premiums and very few people draw benefits. That’s the source of the $70 billion “savings.” But the premiums collected in the program’s early years will be needed very soon to pay actual claims. Not only that, but the new insurance program is so poorly designed it too will need a federal bailout. So this is far worse than a benign sleight of hand. The Democrats have created a budgetary monster even as they used misleading estimates to tout their budgetary virtue.

There is much more, of course. CBO’s cost projections don’t reflect the administrative costs required to micromanage the health system from the Department of Health and Human Services. The number of employers looking to dump their workers into subsidized insurance is almost certainly going to be much higher than either CBO or the chief actuary now projects. And the price inflation from the added demand of the newly entitled isn’t factored into any of the official cost projections.

We’ve seen this movie before. When the government creates a new entitlement, politicians lowball the costs to get the law passed, and then blame someone else when program costs soar. Witness Massachusetts. Most Americans are sensible enough to know already that’s what can be expected next with Obamacare.

Obama’s Budget Director: Powerful Rationing Panel (Not Doctors) Will Control Health Care Levels