One of the Obama administration's talking points in favor of the Patient Protection and Affordable Care Act has been that the law extends the solvency of the Medicare trust fund. By slowing the growth of Medicare spending, the law postpones the date when the Medicare Trust Fund will be exhausted to 2024 from 2016.
Conservatives have typically responded that this claim involves double counting. The law cuts Medicare spending in order to make funds available to finance and expansion of Medicaid and subsidies for middle-income people to buy private health insurance. If the money is being spent on a new benefit, it can't also be used to shore up Medicare.
The president's double count is actually in line with the silly law that governs the Medicare Trust Fund -- more on that later -- but as a matter of measuring fiscal sustainability, the conservative critics are right: You can't spend money and say it's being set aside to cover debts due in the future.
But now, Mitt Romney is doing a Medicare double-count of his own which is in line with neither the law nor any reasonable yardstick for fiscal sustainability. Campaign spokeswoman Andrea Saul says Romney's plan will "repeal Obamacare and replace it with patient-centered reforms that control cost throughout the health care system and extend the solvency of Medicare."
It's hard to see how that can be the case. Romney would repeal the Medicaid and insurance subsidy provisions in Affordable Care Act, theoretically freeing up those funds to shore up Medicare. But he has also pledged to restore the law''s $716 billion in scheduled Medicare cuts over the next decade -- that is, Romney will take the money he saves on Medicaid and spend it on Medicare. If he says these savings will also shore up the Medicare trust fund, he is double counting, too.
The main reason that politicians are able to so abuse the Medicare trust fund in their discussions of it is that the trust fund makes little sense as a fiscal concept. Like the Social Security Trust Fund, it is an accounting fiction. There is no pool of investments in the fund, just Treasury bonds that list the federal government as both creditor and debtor.
The fund's "balance" is a calculation based on the difference between Medicare taxes collected and Medicare Part A expenditures in past years; it does not reflect resources available to the government to fund Medicare in future years. (Medicare Part A is the part of Medicare that pays for inpatient care, and it is the only part of the program with dedicated tax revenues and a Social Security-like trust fund. Medicare Parts B and D, which cover outpatient care and prescription drugs, have a separate trust fund which is funded annually from general revenue, and which therefore cannot be exhausted.)
So when Affordable Care Act cuts spending on Medicare Part A and raises spending on programs not funded out of the Medicare trust fund, it "improves" Medicare's solvency. The law also extends the life of the trust fund by raising taxes that are dedicated to it -- but again, when the Congressional Budget Office measures the law's overall fiscal impact, these taxes are counted as financing non-Medicare expenditure. This is Obama's double count, and it's consistent with the law.
But the allocation of specific revenues and expenditures to the trust fund is arbitrary; Congress could also pass a law reallocating expenses out of the trust fund or revenues into it, which would equally "improve" solvency. This is why looking at the trust fund itself tells you little about whether Medicare is sustainable or has been "fixed."
That said, Obama's thin claim is more defensible than Romney's. Romney's plan also aims to control Medicare spending, but would start cost control 10 years later than the president's. And the effectiveness of Romney's proposed cost control mechanism, premium support, is a subject for debate just like the mechanisms in Obama law.
Romney's claim that he will shore up the trust fund is especially puzzling, because under his plan the fund would be exhausted before any of his savings take effect. Unlike Obama's double count, Romney's count is consistent neither with sound fiscal practices nor with the law.
In defense of Obama's position, one way the Medicare trust fund can matter for actual policy outcomes is if Congress abides by the trigger in current law that gets pulled when the fund is exhausted. If the fund balance falls to zero, Medicare expenditures for hospital insurance legally cannot exceed Medicare tax receipts.
For example, in 2020, Medicare's actuaries estimate that hospital insurance costs will reach 3.61 percent of taxable payrolls, but under Romney's plan, Medicare-dedicated taxes would only equal about 3.1 percent of taxable payrolls, meaning that Medicare Part A benefits would have to be cut by about 17 percent.
Arguments like this have been raised on both the left and the right. Liberals argue that extending the life of the Medicare trust fund protects Medicare benefits by law, even if it doesn't change the overall picture for fiscal sustainability. Conservatives, like Charles Blahous, argue that significant Medicare cuts are already scheduled for when the trust fund is exhausted, meaning that Obamacare should not get credit for cutting Medicare spending.
These arguments do not reflect the political reality of Medicare. A haphazard and sudden reduction in spending on Medicare Part A, as would be triggered by exhaustion of the trust fund, is not politically possible. We have seen this with the Sustainable Growth Rate (SGR) mechanism, which is supposed to reduce physician reimbursement rates in Medicare, and which Congress routinely "fixes" with annual overrides.
Limiting Part A spending to actual tax collections would be even less workable than keeping SGR in place, and overriding SGR is one of the most politically uncontroversial fiscal measures in Washington, even less so than raising the debt limit. If the Medicare trust fund were to be exhausted, the best assumption is that Congress would start funding Medicare Part A from general revenues, as is already done with Parts B and D.
If you accept the Blahous position, then the president has a point with his double count -- by cutting Medicare now, and by raising Medicare taxes, he helps the program avoid a sudden drop in expenditure, even if he spends his Medicare savings elsewhere. But even trust fund formalism can't save Romney's version of the double count.
Read more breaking commentary from Bloomberg View at the Ticker.