Charles Blahous is a Senior Research Fellow at the Mercatus Center at George Mason University. Jakina Debnam is a Research Analyst at the Mercatus Center at George Mason University.
The Supreme Court's decision on the 2010 healthcare law may result in what appears to be a fiscal windfall for the federal government. But it would be a grave mistake for lawmakers to react to illusory savings with real new spending.
To illustrate this point, let's look at a few of the possible Supreme Court rulings—and their projected fiscal consequences.
The simplest decisions would be for the court to either uphold the legislation in its entirety, or to completely overturn it.
In the case of full implementation, federal spending is projected to increase by $1.15 trillion in the next 10 years and deficits to increase by at least $340 billion. Accordingly, in the case of the law being wholly struck down, spending will be $1.15 trillion lower over the next 10 years, and deficits would be $340 billion lower than if the law had been allowed to go into full effect.
This is not universally understood because of frequent press references to a Congressional Budget Office scoring that some have misinterpreted as meaning that the 2010 health law would reduce federal deficits. But as the Congressional Budget Office is always diligent about disclosing, this score does not evaluate the actual change in law under the 2010 statute. The effect of the actual change in law passed in 2010 is to increase deficits.
Furthermore, if the court upholds the law in its entirety, some of its most controversial cost-saving provisions may be later overridden or scaled back by Congress. In this case, it's likely that spending will increase by roughly $1.24 trillion over the next 10 years leading to a deficit increase of more than $500 billion.
Of course, the Supreme Court may only strike down parts of the law, leaving other components intact.
From the perspective of improving federal finances, a hypothetical best-case scenario would involve the court striking down most of the law's cost-increasing provisions, while allowing its cost-savings provisions to stand. While this is an attractive scenario from a fiscal perspective, the constitutional basis for such a favorable outcome is not clear based on the court's prior deliberations.
Suppose instead that only the law's health insurance purchase mandate is struck down on constitutional grounds. The Congressional Budget Office has projected that eliminating this mandate would improve federal finances by roughly $282 billion over 10 years. This would lessen the law's fiscal damage—but not by enough to make it, on net, a true fiscal gain. Moreover, this outcome might not be politically sustainable, as it would likely result in large health insurance premium increases for consumers.
Due to the quirks of Congress's scoring rules, this scenario would result in an "official" finding of a fiscal windfall for the federal government, even though in reality the healthcare law would still somewhat worsen the federal deficit. Some have suggested that this new fiscal credit be used to replace some of the sequestration spending cuts currently required under the Budget Control Act. But it would be very imprudent to spend net "savings" that arise on paper (i.e. under scorekeeping conventions) but not in reality.