Administration Still Double-Counting Medicare Cuts

Last year, the administration grew fond of "double counting" the savings from the Medicare cuts in health care reform--claiming that they'd reduced the deficit, paid for reform, and extended the life of the Medicare trust fund.  Eventually, Republicans got around to asking for an analysis from the CBO, which told us what anyone who ever took first year accounting already knew:  this is not true.  If you used the savings to "pay for" the new spending, you can't also say that you've used them to shore up the finances of Medicare.


As I explained at the time:

Basically, Medicare, like Social Security, has a "trust fund" (actually, more than one), which is supposed to fund it until the trust fund is exhausted in 2019.  The "trust fund" does not exist in any meaningful sense, because its "assets" consist of claims on the general fund, i.e. all the rest of the tax money.  As Medicare goes into deficit, it trades in those assets to cover its funding gap, which means the general fund has to find the money to pay off the special bonds by either raising taxes, cutting other spending, or borrowing more money.  After the trust fund is exhausted, the general fund has to find the money to pay for the Medicare deficit by either . . . raising taxes, cutting other spending, or borrowing more money.  The difference to taxpayers is nil.

Technically, when you cut Medicare spending, that money shows up as an increase in the Medicare trust fund, rather than some other possible accounting entry.  But the effect on the unified budget is the same:  the money saved by cutting Medicare is spent on other stuff.  Whether Medicare is "calling bonds" or "demanding money to cover its deficit", we still have to find exactly as much money to pay for Medicare as we did before.  Which is a lot of money.  One of the reasons the projected deficits for the rest of the decade are so big is that the cost of Medicare is outstripping the revenue raised by its payroll tax, and so we have to shovel in more and more money from the general fund.

So while you can technically claim that you have increased the Medicare trust fund, you then have to recognize that you have introduced an equally sized liability on the general fund, which would mean that this bill increases the deficit by hundreds of billions of dollars, rather than reducing it.

Or, as the CBO said:

The key point is that the savings to the HI trust fund under the PPACA would be received by the government only once, so they cannot be set aside to pay for future Medicare spending and, at the same time, pay for current spending on other parts of the legislation or on other programs. Trust fund accounting shows the magnitude of the savings within the trust fund, and those savings indeed improve the solvency of that fund; however, that accounting ignores the burden that would be faced by the rest of the government later in redeeming the bonds held by the trust fund. Unified budget accounting shows that the majority of the HI trust fund savings would be used to pay for other spending under the PPACA and would not enhance the ability of the government to redeem the bonds credited to the trust fund to pay for future Medicare benefits. To describe the full amount of HI trust fund savings as both improving the government's ability to pay future Medicare benefits and financing new spending outside of Medicare would essentially double-count a large share of those savings and thus overstate the improvement in the government's fiscal position.

But I really shouldn't say that you "can't" double count the savings, because obviously, it is still physically possible to say untrue things.  And apparently, the administration has decided to do just that.  Kathleen Sebelius, who certainly ought to know better, had a rather extraordinary exchange with Phil Klein of the American Spectator yesterday:

In her opening remarks, Sebelius promoted a new report that said the changes made to Medicare would save $8 billion over the next two years, and $575 billion over 10.  The report also says that, "Implementing these changes extends the life of the Medicare Trust Fund by 12 years from 2017 to 2029, more than doubling the time before the exhaustion of the Trust Fund."

During the question and answer session, I asked how the administration could claim the same money could be used to pay for two different things.... I then followed up by asking: "It's a budget convention, but in reality, the $575 billion can't be used to extend the trust fund for 12 years and simultaneously used to finance coverage for 30 million people. Is that correct?"

At this point, Sebelius jumped in to say I was wrong.

"Actually, that is not correct," she said. "There are two different operating methods of looking at this, and the CMS actuary in the report that you cite differs in his strategic opinion from every accounting methodology that's used for every other program in the federal budget, that has traditionally used for Medicare. And he has a different interpretation that is not agreed upon by either the Congressional Budget Office or the OMB or traditionally in Congress."

As you can see from the above, this is simply incorrect; no one at the CBO thinks that these sorts of word games are appropriate.  Moreover, this "accounting methodology" is not used for every other program in the federal budget; the special off-budget status of the trust funds is very rare.  Indeed, the fact that the trust funds create these kinds of artifacts, which can be used by politicians in misleading ways, is one of the best arguments against this sort of accounting.

During the election, I supported Obama's candidacy in part because he seemed to be serious about producing good numbers for his programs.  It's extraordinarily dismaying to see his Health and Human Services Secretary so firmly committed to making obviously misleading claims about his largest legislative achievement.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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