President Obama has persistently tried to have it both ways when it comes to the Medicare cuts in his signature health care law. He and others in his administration have repeatedly claimed that the law extends the solvency of Medicare and is fully paid for. Both claims can’t be true.
Earlier today, I was able to catch up with Richard Foster, the chief actuary of the Center for Medicare and Medicaid Services, before he testified to the House Budget Committee, and I asked him to explain the complicated “double counting” issue. I’ve transcribed the full explanation below, but the key point is that the same money cannot be used twice, even though though the quirky trust fund accounting conventions of our entitlement system would seem to suggest that this is possible.
Here’s how it would work under his simplified example:
“Let’s say that we get an extra $100 of hospital insurance tax revenues because of the Affordable Care Act. So, $100 in cash shows up in the Treasury because of this additional tax. It’s credited to the trust fund for Treasury securities, such as bonds. And the actual cash sits there until someone needs it for some immediate purpose – whether that’s paying for the coverage expansions in the Affordable Care Act, or for anything else that’s an immediate purpose, like education, or infastructure. So the actual cash is spent for whatever purpose it’s needed. But we have $100 in Treasury securities, which earn interest and can be redeemed for $100 in cash any time we need it.
So, fast forward two or three years or more and say the hospital trust fund needs the money. We then say, 'Okay, here’s our security, pay us back.' And Treasury does. They get us the cash including any accrued interest. And then we go use the cash to keep paying benefits longer. Now, where did that cash come from? It wasn’t the first cash we talked about. That’s long gone. So for Treasury to redeem the assets, it has to come up with new resources to pay back that money. So, on the one hand, the fact of the Affordable Care Act does both things. It creates Medicare savings and those can help pay for the other costs of the bill, and that can help extend the life of the trust fund. But the original $100 can’t do all of that. You need $200 to do all that. So when we get the money repaid, it has to come from somewhere, whether it’s borrowing or any other source of revenue. So that’s how it works. It amounts to double counting in important respects. On the other hand, it’s been done this way ever since Medicare and Social Security began.
In other words, if the government uses the Medicare savings in the health care law to extend the life of Medicare, then the U.S. Treasury will have to come up with another way of paying for the health insurance subsidies, the Medicaid expansion, and all other new spending in Obamacare. If, however, all the savings are ploughed into the new entitlement, the government will have to come up with other ways to pay for Medicare.