After the Supreme Court, higher cost and unrealistic timeline will force major changes

Reuters

People with disabilities rally at the Capitol Building in Washington, on Sept. 21, 2011. The group called for Congress to avoid cutting Medicaid funding as they look for cuts to the federal budget.

Article Highlights

  • Gov. Mitch Daniels said the Medicaid expansion would cost Indiana $2 billion over 10 years.

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  • If 20% of those who would otherwise be enrolled in Medicaid shift to an exchange plan, it’ll add $65 billion to ACA costs.

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  • The ACA is primed for massive amounts of federal spending. Will the health system be ready?

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The Supreme Court has spoken, but problems built into the Affordable Care Act (ACA) have not been resolved by the decision and may have worsened.  Even accepting the law’s assumptions about how the health system should be reformed, actually putting all the pieces in place is exceptionally expensive and difficult.  If President Obama wins a second term, fiscal pressures and practical challenges will force him to scale back the unaffordable spending and slow down the unrealistic implementation timeline.

The next president will step into office with stubbornly high unemployment rates, slow economic growth, and the threat that Europe’s political and economic problems could drive us into a double-dip recession.  The federal debt will soon be banging into the $16.4 trillion limit agreed to in the 2011 Budget Control Act.  If Mr. Obama is president, Republicans will be in no mood to compromise on a package of spending cuts to go along with a debt increase.

The ACA will be in the budget crosshairs.  The Congressional Budget Office (CBO) will update its estimate of the cost of the insurance expansion, and the new number will be higher.  One reason is purely optical, but that matters on Capitol Hill.  In its March 2012 update, CBO estimated that the net cost of the ACA’s coverage provisions is $1.25 trillion over the 11 years between 2012 and 2022.  Next year, CBO will add another year to the table at a cost exceeding $175 billion.  Even though that cost was there all along, the fact that the estimating window now includes it will make for some excellent political fodder.

The Medicaid Decision

The Supreme Court decision on Medicaid will also drive up federal spending.  By making the Medicaid expansion optional, some states are likely to not expand eligibility to 133 percent of the federal poverty level (FPL)—and the alternative is expanded enrollment in subsidized insurance through the exchanges.

Although there is the lure of 100 percent funding for the first three years, there is also the burden of having to pay 10 percent of the cost of the expansion in subsequent years. Governor Mitch Daniels observed that the Medicaid expansion would cost Indiana $2 billion over 10 years, and other governors have expressed similar concerns.  States have been paring back Medicaid eligibility to cope with their own fiscal problems.  Committing to a long-term increase in program spending even on the good terms set out by the ACA would be a difficult sell.

States that do not expand Medicaid eligibility are likely to see many of those who would have been eligible seek insurance through the exchanges.  People with incomes between 100 percent and 133 percent of the FPL will be eligible for premium credits worth thousands of dollars.  An individual at the poverty line ($11,170 in 2012), for example, would be liable to pay no more than the equivalent of $223 a year for coverage that could easily cost $5,000 or more.  Assuming, as CBO does, that a way will be found to allow federally-operated exchanges to distribute subsidies to enrollees,  that translates into billions of additional federal dollars—and no state funds—to cover this population.

Comparing Medicaid costs with those of employer plans gives a sense of how much extra spending we are talking about.  According to CBO, the total cost of Medicaid benefits for adults averaged $3,592 in 2011.  The average employer-sponsored insurance plan cost $5,429 for single coverage in 2011.  Even with beneficiaries making the nominal premium payment required under the exchanges, the difference—about $1,570—is the additional federal cost of shifting one person from Medicaid to private coverage in the exchanges.  Allowing for health inflation, federal spending would increase by $19,900 over the first decade of full ACA implementation for every beneficiary who enrolls in an exchange plan instead of Medicaid.  If 20 percent of those who would otherwise be enrolled in Medicaid make the shift, that adds at least $65 billion to the cost of the ACA.

Other back-of-the-envelope analyses (I’m counting my own in this category) find vastly different increases in federal spending as a result of the Supreme Court decision.  Douglas Holtz-Eakin estimates that federal outlays might increase by as much as $100 billion annually if all the states increase Medicaid eligibility to 100 percent of poverty and everyone between 100 and 133 percent enrolled in the exchanges.  In contrast, Paul Van de Water states that federal spending would remain about the same or even decrease if some states do not expand to 100 percent of poverty.

It is unreasonable to expect that everyone would shift from Medicaid to an exchange plan.  Some people would not enroll when coverage is free to them.  More would decide not to enroll if they have to pay a few hundred dollars a year for health insurance in the exchange.  But it is also unreasonable to think that states won’t try to take advantage of free money when it is offered to them.

A check on the plausible range of increased spending is based on new estimates from the Urban Institute.  Some 4.6 million people with incomes between 100 and 133 percent of poverty are uninsured and potentially eligible for Medicaid under the ACA.  If all of them shifted from Medicaid to the exchanges, the 10-year cost would be $90 billion.  If, alternatively, only those living in the 27 states that filed a federal lawsuit against the Medicaid penalty made the shift, then the additional federal spending would come to about $53 billion.  My estimate falls within that range.  The actual cost could be much higher, depending on the actual cost differential between Medicaid coverage and exchange coverage.

Perhaps we shouldn’t begrudge this accidental benefit to a segment of the low-income population.  Medicaid does not pay enough to ensure broad access to services and providers, and private plans operating in the exchanges would do a better job (at a higher cost).  But the potential consequences for the federal budget are serious.

Implementation Calamity

The ACA is primed for massive amounts of federal spending.  Will the health system be ready?

A few states—including Massachusetts, California, and Maryland—appear to be well along in their implementation activities, but 37 states have not yet enacted enabling legislation or invoked an executive order to establish a state health insurance exchange.  Although some states are waiting for the fall election before deciding whether to commit significant resources to exchange development, all states will face technical challenges.

New processes and standards must be established for certifying qualified health plans (which must satisfy requirements for adequate provider networks, access to essential community providers, essential benefits, actuarial value standards, marketing, and other performance standards) and providing consumer assistance in the enrollment process.  States must interpret thousands of pages of federal regulations, create their own implementing regulations, and translate all of that into concrete actions.  Information on income, citizenship, and other personal data must be obtained from federal agencies before subsidies can be paid.  In some critical areas, including the definition of essential benefits, the federal government has avoided the formal regulatory process, opting to issue “guidance” that throws this particularly sensitive issue into the laps of the states.

It is clear that many states will not have their insurance exchanges operating in time to enroll their citizens in exchange plans before they become liable for the mandate/tax in January 2014.  Moreover, it is doubtful that the federal government—which carefully describes its role as facilitating the state’s exchange rather than running a federal exchange—will be capable of stepping in.  The task is too large, and the time is too short.

Avoiding A Crisis

How does a second-term President Obama avoid the political embarrassment of widespread breakdowns in his health reform plan while making a deal to raise the debt limit?  He could propose legislation to let states proceed at their own pace rather than requiring a uniform national rollout, and couple it with a substantial reduction in the subsidies available through the exchanges.  States that are ready to go live would be allowed to do so; those that need more time could have it.  Substantial spending cuts in other program areas would be needed, and the final deal could well include steps toward major reforms of the tax system and Social Security.

Given the likely balance of political power between Democrats and Republicans under an Obama second term, this is (barely) plausible.  Would Mr. Obama care enough about his legacy to admit that he over-reached, and accept major changes in the ACA that would cede control from Washington back to the states and to consumers?  Would Republicans recognize that even a disastrous implementation of the ACA would not give them much additional leverage to repeal the whole law—particularly if, by 2016, public outrage at the breakdown of insurance exchanges and skyrocketing costs has abated?  Or would we see gridlock of epic proportions, with no increase in the debt limit and a marathon government shutdown until the pain is so great for both parties that they find another way to resolve their deep differences?

Could a President Romney do better?

 

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About the Author

 

Joseph
Antos
  • Joseph Antos is the Wilson H. Taylor Scholar in Health Care and Retirement Policy at the American Enterprise Institute (AEI), where his research focuses on the economics of health policy — including the Affordable Care Act, Medicare, the uninsured, and the overall reform of the health care system and its financing. He also studies the impact of health care expenditures on federal budget policy.

    Before joining AEI, Antos was assistant director for health and human resources at the Congressional Budget Office (CBO). He has also held senior positions in the US Department of Health and Human Services, the Office of Management and Budget, and the President’s Council of Economic Advisers. He recently completed a seven-year term as health adviser to CBO, and two terms as a commissioner of the Maryland Health Services Cost Review Commission. In 2013, he was also named adjunct associate professor of emergency medicine at George Washington University.

    Antos has a Ph.D. and an M.A. in economics from the University of Rochester and a B.A. in mathematics from Cornell University.



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