Repealing the Affordable Care Act Would Lower Federal Deficits

The Congressional Budget Office (CBO) has just released a report on the budgetary and economic effects of repealing the Affordable Care Act (ACA). Press reports reflect what CBO has reported pursuant to its scoring instructions – specifically, that relative to its scorekeeping baseline, repeal of the ACA would worsen the federal deficit but bolster the economy. CBO’s new inclusion of economic feedback with the score – finding that the ACA’s adverse economic effects make the deficit$216 billion worse over the next decade than it otherwise would be – is naturally fostering additional attention. Less noted, however, is the important fact that CBO’s analysis actually indicates that repealing the ACA would lower, not increase, federal deficits.

As CBO states, "the analysis presented in this report is based on the spending and revenue projections contained in CBO's March 2015 baseline, as adjusted for subsequently enacted legislation." Repeal of the ACA is compared to this adjusted baseline. Though euphemistically referred to as a "current law" baseline, it actually does not reflect current law, by lawmakers' direction.

Current law differs from CBO's budget baseline in a very important way, as its March 2015 Budget Outlook explains:

In keeping with the rules in section 257 of the Deficit Control Act of 1985, CBO's baseline incorporates the assumption that scheduled payments will continue to be made in full after the balance of the trust fund has been exhausted, although there is no legal authority to make such payments.

In other words, CBO is required to assume that after a Social Security or Medicare trust fund is depleted, full benefits would continue to be paid even though this is not permitted by law and there is no historical precedent for such action. Though the passage above explained CBO's treatment of Social Security disability insurance, the same scoring rules apply to Medicare spending. The fact that CBO does not score literal Medicare law is hugely important to evaluating the ACA, which makes big changes to Medicare.

Let's look at the numbers to make the point clear. Over the next five years, CBO finds that repealing the ACA would improve the fiscal outlook relative to the scorekeeping baseline, whether or not economic effects are considered.

Of note, this indicates the ACA's effects have significantly worsened since CBO scored a similar repeal bill in 2011. Back then CBO projected repeal would worsen federal deficits by $62 billion from 2016-2020, relative to the baseline. The time by which CBO now finds repeal would worsen federal finances relative to the baseline has been postponed, to the second half of the current ten-year window.

This latest projection of future deficit reduction depends in large part on estimates of escalating revenues from provisions including the yet-to-be-implemented excise tax on high-end "Cadillac" health insurance plans, as well as high-income surtaxes affecting rising numbers of taxpayers. Time will tell whether these tax provisions are implemented as written long enough to eventually produce these large beneficial fiscal effects.

Such uncertainties aside, to understand the true net fiscal impact of repealing the ACA one must understand the treatment of Medicare underlying the score. CBO's latest report says that repealing the ACA would add roughly $800 billion in Medicare costs over ten years relative to the scorekeeping baseline.

But repealing the ACA would not actually increase Medicare expenditures by $800 billion. Due to the trust fund spending limitations described above, Medicare was already required to spend less than this additional $800 billion prior to the ACA's passage, and would similarly be required to spend less than that if the ACA were repealed. CBO's latest estimate does not permit us to know exactly how much less. But we can make an educated guess, enough to be certain that repealing the ACA would lower projected federal deficits.

We know for example from CBO's March Medicare baseline that the agency projects the Medicare HI trust fund balance to be $199 billion by the end of 2022. CBO's latest score indicates that repealing the ACA would increase Medicare costs by $410 billion through that date. Thus, if just half of those additional costs are in Medicare HI, its trust fund would be entirely depleted by 2022 (and possibly earlier) and its spending authority thus curtailed.

Again, CBO's latest does not provide enough detail for us to know how much repealing the ACA would lower federal deficits. But we can be highly confident that it would. In my 2012 paper on the fiscal consequences of the ACA I found that through 2021, only a little more than one-third of the Medicare savings credited to the ACA under the scorekeeping convention was actually new savings relative to prior law. Through 2025 we would expect the proportion to be still less.

Thus, although the scorekeeping conventions require CBO to find that repealing the ACA would increase Medicare spending by roughly $800 billion, the actual figure is almost certainly below $250 billion--or, at least $550 billion lower than the directed score. Given that this total score shows repeal adding either $353 billion or $137 billion to the deficit, depending on whether economic feedback effects are included, the actual change in law under repeal would clearly reduce the deficit.

All this can be verified by cross-checking CBO publications against one another (or by consulting other sources such as CRFB) to confirm that its scorekeeping conventions, as required by lawmakers, deviate significantly from actual law. Given the importance of these deviations with respect to Medicare spending, CBO should consider disclosing these realities more directly in future evaluations of the ACA, such as the one it may need to issue after King v. Burwell.

In the meantime, however, we have yet another report showing the ACA's finances turning out worse than previous projections and, properly understood, also showing that repeal--whatever its other policy virtues or drawbacks--would improve the fiscal outlook.