Did Obamacare’s Cost Savings Just Evaporate?

No. They merely took a moderate and unsurprising dip.

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Congressional Budget Office Director Doug Elmendorf

The idea that health care reform constituted meaningful reduction of the budget deficit was always oversold. “It seems prudent to conclude only that the Senate bill would pay for itself,” I wrote in December. In his zeal to get the bill through Congress, President Obama wasn’t prudent. Health reform, he said on March 18, is “the most significant effort to reduce deficits since the Balanced Budget Act in the 1990s.”

The Balanced Budget Act of 1997 was projected, at the time of its passage, to cut Medicare spending by $394 billion over 10 years. Apparently it came pretty close. The Patient Protection and Affordable Care Act of 2010 was projected, at the time of its passage, to cut the budget deficit by $143 billion over 10 years. Now it looks like a more plausible estimate would be closer to $113 billion.

This revision derives from a May 11 analysis by the Congressional Budget Office that has congressional Republicans up in arms. “It was clearly irresponsible for Washington Democrats to force this legislation through Congress without being truthful about its full impact on the nation’s finances,” said House Minority Leader John Boehner. That isn’t fair, because the new data wasn’t available when the bill passed in March. My lowering of Obamacare’s likely budget savings by $30 billion takes into account costs that, even when judged much smaller by the CBO in March, were never formally incorporated into the bill’s price tag (and still haven’t been). The reason for this has nothing to do with the Democrats, and everything to do with the arcana of budgetary accounting on Capitol Hill—as practiced by Democrat and Republican alike.

More to the point, Boehner’s calculation of the additional cost to the health care law (widely repeated in the press) is simply wrong. Boehner says it’s $115 billion, which would reduce the law’s 10-year budget savings from $143 billion to a mere $28 billion. That would be a startling change. But roughly $85 billion of that $115 billion is money that’s already being spent. The true spending increase attributable to Obamacare is therefore more like $30 billion. Subtract $30 billion from $143 billion in savings and you get a still-respectable $113 billion in savings. (It should be noted that neither the CBO’s revised analysis nor a blog post by CBO Director Douglas Elmendorf explains any of this.)

What is this newly discovered spending?

Essentially, it’s costs associated with implementing health care reform. These include the federal government’s costs in administering the bill through agencies like the Health and Human Services Department and the Internal Revenue Service. They also include the cost of grants created under the law. For some of these grants, the law suggests particular spending levels; for others, it does not. (The fudging term of art is “such sums as may be necessary.”)

In Washington parlance, these newly described costs fall under the rubric of “discretionary spending,” i.e., spending that congressional appropriations committees may or may not approve at a level of their choosing. It is seldom the case that these committees will approve all the money envisioned for a particular program. But it’s usually a good bet that if the funding was included in a previous appropriation, it will be included in the next. It’s spending increases for this or that category which tend to get scrutinized. So it’s probably rash to assume that all $30 billion of the estimated new discretionary spending related to Obamacare will actually get spent. Much of it will have to be in order to implement the health reform law. But some of it, especially the money dedicated to grants, may not be. (On the other hand, CBO is unable even to guess how much will be spent on grants about whose funding the health reform bill is entirely silent. If Congress spends anything at all to fund these grants, then the previously-unaccounted-for spending might conceivably exceed $30 billion.)

During the month of March, CBO’s 10-year savings estimates for the health care bill rose from $118 billion to $138 billion to $143 billion. Yet Boehner uttered not a peep of complaint about Democrats not “being truthful about its full impact on the nation’s finances.” That’s because the bill’s estimated cost was going down, not up. The fact is we can’t know the precise extent to which the health reform law’s tax increases, Medicare spending cuts, and new spending will balance out, because there are too many variables. But given the roughly $113 billion in government spending it currently looks like the bill will save, it seems a safe bet that Obamacare will be able to finance itself over the next decade. That’s no minor accomplishment.

Update, May 13: The CBO, apparently realizing it did a lousy job explaining all this on the first go-round, has posted further explanation here and here.

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