Published for www.online.wsj.com, May 1, 2012

One of the enduring mysteries of President Obama’s health law is how its spending constraints and payroll tax hikes on high earners can be used to shore up Medicare finances and at the same time pay for a massive new entitlement program. Isn’t this double counting?

The short answer is: Yes, it is. You can’t spend the same money twice. And so, thanks to the new health law, federal deficits and debt will be hundreds of billions of dollars higher in the next decade alone.

Here’s how it works. When Congress considers legislation that alters taxes or spending related to Medicare’s Hospital Insurance Trust Fund, the changes are recorded not just on the Hospital Insurance Trust Fund’s books, but also on Congress’s “pay-as-you-go” scorecard.

The “paygo” requirement is supposed to force lawmakers to find “offsets” for new tax cuts or entitlement spending, and thus protect against adding to future federal budget deficits. Putting the Medicare payroll tax hikes and spending constraints on the “pay-as-you-go” ledger was instrumental in getting the health law through Congress, because doing so fostered a widespread misperception that the law would reduce future deficits.

But the same provisions add to the Hospital Insurance Trust Fund’s reserves, which expands Medicare’s spending authority. Medicare can only pay full benefits so long as its trust fund has sufficient reserves to meet these obligations. If the trust fund has insufficient resources, then spending must be cut automatically to ensure the fund does not go into deficit. The health law’s Medicare provisions prevent these spending cuts from taking place for several more years.

Full post here

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