The paper's central assumption is rooted in years-old conservative unhappiness with the structure of popular entitlement programs, which are financed via trust funds. These trust funds help keep the programs protected from legislative meddling by politicians who'd like to roll them back and spend the money elsewhere. But they also require complicated accounting methods that at times make it difficult for laypersons to understand how the financing regimens work -- and allow opponents to muddy the political waters.
So how can Obama's reform law both take from Medicare and give back to it all while extending insurance to tens of millions of Americans? Once you move beyond sound bites, it isn't a difficult issue to understand. First, look at Medicare as a program all its own -- an enduring feature of the domestic policy landscape, completely distinct from 'Obamacare.'
Medicare spending is projected to explode over the coming years, in large measure because health care costs are becoming more expensive and, crucially, because we assume the country won't support abruptly slashing benefits that have been promised to seniors their whole working lives. That means Congress has to frequently retool the program so that its per-beneficiary costs stay low. When the health care law took steps to dramatically reduce those expected future health care expenditures, the saved money was reallocated to extending health care coverage to the uninsured. Both programs win.
"For as long as anyone's been doing either Medicare or budget projections, those projections have always assumed that Medicare hospital insurance benefits are paid in full, even if the trust fund at some point doesn't have quite enough money to pay for 100 percent of benefits," said Paul Van de Water, a Medicare expert at the liberal-leaning Center on Budget and Policy Priorities.
The Mercatus report comes at the problem a different way. It's written by Charles Blahous, a top economic adviser to President George W. Bush who was active in that administration's efforts to privatize Social Security. He concludes that the law will actually increase deficits by about $340 billion.
One of the conservative assumptions Blahous relies on to come to that conclusion is the basis of the so-called "double counting" critique, which says that if savings taken from Medicare are spent on other priorities, they can't -- or shouldn't -- also be counted toward improving the program's solvency. Advocates of this argument raise a fair point: If the health care law used savings taken from other programs, then those programs would have to be shrunk, and wouldn't automatically be allowed to draw on new government funds by fiat.
Doug Holtz-Eakin, a conservative economist and former director of the Congressional Budget Office who now runs the American Action Forum, argues for this point of view. Follow the money flowing into the Treasury from the Medicare taxes in the health care law, he advises.
"It comes into the Treasury, the Treasury says this is Medicare money, it gets deposited in the Medicare trust fund, Medicare doesn't need the money now to pay so it gives it back to Treasury and gets bonds back instead," Holtz-Eakin said.
Treasury then uses that money, among other things, to provide subsidies to the uninsured -- it's been spent. Years later, when Medicare needs to cash out that bond, the government has to either borrow, tax or cut other spending to honor it. The savings, in other words, didn't really hold up. "[The law] increased the deficit and a future Congress has decided that's not acceptable and does something about it," Holtz-Eakin said.
There's a real logic to this. But it requires looking at Medicare not as a retirement guarantee, but as an ordinary government program that hasn't been promised to generations of workers, whose costs are baked into the country's long-term budget.
"The point that Chuck makes is that from a technically correct, legal point of view, the hospital insurance part of Medicare is constrained so that once you've depleted the trust fund balance to zero you can only spend as much as is coming in, primarily from payroll taxes," Van de Water said. "If we did things that way, a lot of stuff would look different."
Indeed, if things really worked this way, the country's budget picture would look fine -- Medicare cuts and Social Security cuts would happen abruptly and automatically whenever funding ran dry. That the public wouldn't stand for this is key to the programs' durability and the reason long-term budget projections look so dire. But they're also why Obama is on solid ground saying he extended Medicare's life and used the savings to pay for the health care law.
Unless future Congresses control Medicare-spending growth or increase funding to the program down the line -- or unless 'Obamacare' does a better-than-expected job of reducing health care cost growth -- the program's costs are expected to swamp the rest of the budget in the coming decades. The trust fund system makes it difficult for Congress to do this simply by scaling back the program's benefits. They've got to figure out how to preserve the guarantee. This is problematic for those who want to shrink government programs.
"I do not believe we should have trust funds," Holtz-Eakin said. "Our budget problem is entitlements, and entitlements have trust funds."
But for supporters of these programs, this is really just a Trojan horse.
"The trust fund notion is bound up with the notion of creating a system in which people are considered to have earned the right to their benefits by paying in taxes, whether it be Social Security or part A of Medicare," Van de Water said. "Opponents of these programs don't like that notion. It makes the programs too hard to change, and since they think they should be changed, they find that result unfortunate. Of course we know that both Medicare and Social Security and any other government program can be changed. While Social Security isn't changed very often, Medicare is changed all the time [and] there's a strong rationale for maintaining a strong degree of predictability and dependability on programs that people are counting on for their retirement benefits."
The other Medicare trustee -- Democratic appointee Robert Reischauer -- dismisses the Mercatus study as misleading old hat.
So does Don Berwick, the man who led implementation of the health care law as director of the Center for Medicare and Medicaid Services. "The economist who's coming up with this new standard, he's simply arbitrarily abandoning a standard that the non-partisan CBO uses and has used for years," Berwick said.
You can read the Mercatus report in full below.