Affordable Care Act's Financial Unraveling: Predictable, and Predicted
Advocates marketed the Affordable Care Act (ACA), known colloquially as "Obamacare," to the American public as a way to "bend the cost curve" of soaring health care costs downward. But despite its supporters' hopes, the 2010 legislation was fiscally reckless, markedly increasing the government's already-unsustainable health spending commitments at a time of record deficits.
Advocates marketed the Affordable Care Act (ACA), known colloquially as "Obamacare," to the American public as a way to "bend the cost curve" of soaring health care costs downward. But despite its supporters' hopes, the 2010 legislation was fiscally reckless, markedly increasing the government's already-unsustainable health spending commitments at a time of record deficits. Three years later, the fiscal harm stemming from the ACA is as bad as-and even worse than-many experts predicted. The problem lies with the nature of the law itself, promising trillions in new government benefits while relying on dubious financing mechanisms. These problems were not only foreseeable, they were indeed widely foreseen.
Even before the president signed the ACA into law, non-partisan analysts demonstrated that the belief it would reduce federal deficits was based on a misunderstanding of government accounting. The ACA's projected savings from Medicare payment reductions were in effect being doubly committed: once to extend Medicare solvency and a second time to fund a massive coverage expansion. Both the Congressional Budget Office (CBO) and the Medicare Chief Actuary alerted Congress to the problem at the time. By counting projected savings only once, my own subsequent study demonstrated that the ACA would add roughly $340 billion to federal deficits in its first decade.
The reality was always likely to be worse than that estimate. The positive case for the ACA's financial integrity hung on two improbable outcomes: that all of its cost-savings provisions would work exactly as hoped, while none of its spending provisions would cost more than envisioned. Yet CBO warned at the time that many of the law's cost-saving provisions "might be difficult to sustain," while the Medicare Chief Actuary also warned that projected savings "may be unrealistic." My own conclusion after the law's passage was that, "the proceeds of such cost-savings cannot safely be spent until they have verifiably accrued."
No sooner was the ink dry on the ACA before these warnings began to prove correct. Many of the law's financing mechanisms started to unravel, while pressure mounted to expand its new spending programs. One of the first provisions to bite the dust was the CLASS long-term care program, suspended in 2011 due to its financial unsoundness. This wiped out a revenue source counted on to produce $70 billion during the first decade to help finance the ACA's coverage expansion.
The 2012 U.S. Supreme Court decision further complicated the law's financing. The original idea under the ACA was that states would expand Medicaid while more generous federal subsidies provide for others to buy health coverage from newly established exchanges. But the Court rendered Medicaid expansion optional for states, thus giving them an incentive to let the federal government shoulder the entire cost of subsidizing more generous insurance coverage for those above the poverty line. Many states are now taking advantage of this latitude, likely increasing federal costs for the exchanges.
Another of the ACA's important financing sources-supposedly delivering $140 billion in revenues over 10 years-was the requirement that employers offer affordable coverage to workers or pay a penalty. But earlier this year the Obama Administration announced it would not enforce this requirement during its statutory implementation year of 2014.
Labor leaders' recent appeal to expand ACA health exchange subsidies to multi-employer plans is but one example of a cost-escalating dynamic that many of us predicted. As I observed last year, "The ACA creates a horizontal inequity between two hypothetical low-income individuals; one who purchases insurance via an exchange receives a substantial direct federal subsidy, whereas one who receives employer-provided insurance (ESI) does not. This differential treatment could well lead either to the second individual's moving into the health exchanges (thus increasing participation rates) or to the federal government expanding low-income subsidies to those with ESI (increasing costs)."
The Obama White House correctly informed labor leaders that it lacked authority to provide them with these subsidies, but the political pressure to change the law will not end there. Indeed, we have already seen some subsidies expanding beyond the ACA's original construction, for members of Congress and their personal staffs.
The ACA's finances further depend on a new tax on medical device manufacturers, estimated to raise $29 billion from 2013-'22. Pressure is building against this tax, and the Senate already cast a nonbinding vote of 79-20 in favor of repeal. This issue was just resurrected during recent congressional debate over the continuing resolution (CR).
Also of uncertain fate is the ACA's "Independent Payment Advisory Board" (IPAB)-the unelected board charged with implementing policies to hold down Medicare costs with minimal congressional interference. Strong bipartisan opposition to IPAB persists, and as of this writing there is no sign of anyone even being nominated to serve on the board.
Finally, there are the ACA's most dubious financing sources. These include a new 3.8 percent "unearned income Medicare contribution" (UIMC) and a new tax on "Cadillac" health insurance plans. The income thresholds for the UIMC are not indexed for inflation, so under law most workers would eventually be subject to the tax-over 80 percent of workers within 75 years, according to the Medicare trustees. Past experience with legislation overriding other non-indexed taxes like the Alternative Minimum Tax (AMT) demonstrate why projections of escalating UIMC revenues should be taken with a hefty grain of salt. So, too, with the so-called "Cadillac plan tax," designed to hit more and more health insurance plans over time, an outcome that organized labor is determined to prevent.
The problematic nature of the ACA's finances is such that CBO's latest "long-term budget outlook" singled out its implementation as one of the biggest sources of future fiscal strains. Through 2038, CBO attributes 35 percent of the cost growth in federal health programs to population aging, 40 percent to general health inflation, and another 26 percent to the implementation of this single law. CBO now projects that merely delaying ACA implementation for one year would save $36 billion.
Partisans point fingers over the reasons for the ACA's financial unraveling, but the actors in this drama are too diverse to blame any one person or group. The task now facing both supporters and opponents is to take the steps necessary to prevent further fiscal damage, by scaling back the ACA's spending commitments before millions become dependent on benefits that the government is not in a position to pay.