One More Way Obamacare Could Increase the Deficit
Amidst all the assumptions surrounding the health care law, one key factor has not received much attention – namely, the significant way economic projections have changed since the law’s enactment, and the critical effect they could have at the time of the law’s implementation. In August 2009, the Congressional Budget Office released its mid-year economic forecasts, which were the forecasts CBO analysts used when scoring the various health care bills that fall, including the measure that eventually became law. At the time, CBO projected that in 2014 – when the Exchange subsidies and Medicaid expansion take effect – unemployment would average 4.9 percent.
Fast forward two years later, to CBO’s most recent economic update, published in August. CBO now projects that unemployment in 2014 will be 7.9 percent. That’s more than a 60 percent increase in the projected unemployment rate for 2014 compared to estimates at the time the law was enacted. This increase will have two primary fiscal effects, neither of them positive:
- In the short term, the projection means more unemployed individuals will receive federally subsidized coverage, until the unemployment rate declines to more historic levels. Given a civilian labor force of about 154 million individuals, a 3 percentage point increase in the projected unemployment rate means there will be about 4.6 million more unemployed workers in 2014 than CBO’s projections at the time the law passed. Most of those unemployed workers will be eligible for federal insurance subsidies, due to their lack of income and employer-based insurance. Presuming an average federal insurance subsidy in 2014 of $4,610, the overall cost of insurance subsidies in 2014 would be about $21.3 billion higher than expected, due to millions more workers being unemployed than at the time CBO first estimated the law. This is of course a crude estimate, and the number could be slightly lower – some unemployed workers might be placed in Medicaid, and some might have other sources of insurance without relying on federal subsidies. But what’s most worrying is that the $21.3 billion higher-than-expected spending number is just for one year – meaning that the costs could be much higher if in fact we are in the middle of an economic “lost decade,” with a stagnant economy and sluggish employment.
- The longer term effects could be even more dramatic. An economy with nearly 8 percent unemployment in 2014 would have far more excess labor capacity than an economy at 5 percent unemployment. Economic theory, as well as basic common sense, suggest that if unemployment remains high in 2014, firms would be much more likely to drop coverage – knowing that their employees would be unlikely to complain if the macroeconomic situation was such that workers couldn’t easily find other jobs, but firms could easily find other workers. At 8 percent unemployment, some firms may view 2014 as a “golden opportunity” to offload their health costs at the federal government, before labor markets lose their slack, unemployment returns to more normal levels, and workers have more negotiating power when it comes to salaries and benefits. And of course, if many firms do drop coverage, the cost of federal insurance subsidies will explode, as former CBO Director Doug Holtz-Eakin and others have noted.
It remains unclear whether CBO has conducted a full re-estimate of the law to take into account these changes in economic projections. CBO’s most recent baseline projects a 1 million increase in Exchange enrollment, and a 1 million decrease in Medicaid enrollment, in 2014 when compared to the original estimates for the law. However, these relatively minor tweaks do not make clear whether CBO has considered the impact of nearly 5 million more unemployed workers than CBO projected in 2009-10. Perhaps CBO will address this issue more fully when conducting their annual baseline updates early in the new year.
Few Americans believe the health care law will end up reducing the deficit, as Democrats claim. Conversely, many Americans remember President Obama’s broken promise that the “stimulus” would keep unemployment below 8 percent. What hasn’t been articulated to this point, but what the data bear out, is the way in which the latter could help lead to the former – another example of the flawed fiscal policies of this Administration.