March 18, 2010
"[Rising federal debt] leaves us very vulnerable to a global rise in interest rates that might be substantially beyond our control....It's a little like what happened to the subprime borrowers-people are just assuming the funding will always be there."
--Harvard Professor Kenneth Rogoff, quoted in New York Times on rising interest rates, June 3, 2009
A June 1, 2009, blog post by Office of Management and Budget Director Peter Orszag attempted to define the White House's more than $1 trillion health reform initiative as fiscally responsible because "at worst, we [will] have a deficit-neutral plan that will not worsen our fiscal situation." However, a history of government-run health programs illustrates a fundamental flaw in Orszag's premise-new health entitlements have frequently exceeded cost estimates by very wide margins:
- At the time of its enactment in 1965, actuaries for the House Ways and Means Committee projected that in 1990, Medicare Part A would spend $9.1 billion on hospital services and related administration. In reality, spending in 1990 totaled nearly $67 billion-more than seven times the original estimates.
- Prior to its enactment, the Medicare Part B program for physician services was projected to be funded through a $3 monthly premium, supplemented by "federal appropriations of about $500 million a year from general tax revenues." In 2008, Medicare Part B relied upon $146.8 billion in federal general revenues-an increase of nearly 4300 percent in inflation-adjusted spending.
- In the first ten years following its enactment in 1997, the State Children's Health Insurance Program relied upon two separate federal bailouts totaling nearly $1 billion to subsidize "shortfall states" which overspent their federal allotment.
- The Massachusetts health plan-a model for Democrat reform proposals-has experienced significant budgetary pressures in the three short years since its enactment. Massachusetts' overall costs for health programs have risen 42 percent since 2006, and the cost of the Commonwealth Care program-which subsidizes health insurance for "low-income" families-exceeded projections by more than 50 percent in Fiscal Year 2008.
- President Obama's own campaign plan said that enacting health reform "will cost between $50-65 billion a year when fully phased in," and that savings from the health system itself would fully fund coverage expansions; any up-front spending would be "more than covered by allowing the Bush tax cuts to expire for people making more than $250,000 per year." However, most estimates suggest the true cost may be more than twice the campaign's estimates-and a report by the Senate Finance Committee indicates that Democrats are exploring new taxes on alcohol, soda, and college students to fund this entitlement spending.
- One of the few government health programs to come in under projected estimates has been the Medicare Part D prescription drug program; actuaries at the Centers for Medicare and Medicaid Services recently noted the plan's costs are 40 percent below estimates at the time of the bill's passage in 2003. The Part D benefit relies entirely upon competition among private plans to drive down costs-unlike most Democrat proposals, which rely on government-run health plans that have a history of exceeding projected costs, not controlling them.
"Over time, lenders began pushing low-income buyers into homes they could not possibly afford...offering low, teaser interest rates that explode after the initial grace period."
-Barack Obama, Financial Times op-ed on subprime lending, August 29, 2007
Given the history of exploding spending in government entitlement programs, the $1 trillion price tag currently being discussed for health reform represents the tip of the spending iceberg. Members may view the currently proposed spending levels as a $1 trillion "teaser" that could also "explode after the initial grace period" in the same manner as President Obama criticized subprime loans. And just as many home borrowers in recent years believed the value of their homes would never decline, Democrats have not considered that the cost of health reform could significantly exceed projected estimates.
The cost of exceeding projections was brought home by a recent Congressional Budget Office letter analyzing the potential impact of an increase in interest rates over the ten-year budget window. Specifically, the letter found that using the most recent "blue chip" economic forecast of long-term interest rate projections would increase total deficit spending by $1.2 trillion over ten years when compared to the March CBO estimate of the President's budget. If interest rates returned to their average levels during the 1980s, the United States could face an additional $5.6 trillion in red ink-even before the effects of increased spending on health care entitlements is taken into account.
Some Members may therefore question the priorities and actions of the Democrat majority with respect to its proposed massive expansion of government-run health care:
- Why are Democrats so scornful of subprime lenders who allegedly placed Americans into loans that "exploded" after several years so unwilling to confront the possibility that health reform could have the exact same effect on the federal budget.
- What will happen if the new entitlements proposed end up costing significantly more than the $1 trillion projected? Will health reform legislation contain "triggers" requiring Congress and the federal government to scale back entitlement programs in the face of escalating costs, or will federal spending-and the debt passed on to future generations-continue to rise without limit?
- What are the economic and national security implications of relying on countries like China to finance the proposed new government-run health system?
After Treasury Secretary Geithner's claims of the United States' fiscal rectitude were publicly mocked by an audience during his recent visit to China, Democrats would be wise to provide much more clarity-and spending restraint-before embarking on a new and costly initiative to expand government-run health insurance to as many as 114 million Americans.
For additional information, contact:
The House Republican Conference Policy Office