Whatever Scenario You Use, Obamacare Makes the Deficit Worse

Published March 18, 2013

Consumer Power Report #365

A few weeks ago I commented on the pushback about the GAO’s report that highlighted the deficit damage done by President Barack Obama’s health care law over the coming years. A much more sophisticated critique comes now from Christopher Conover of AEI:

But things go to hell in a handbasket under either the alternative or baseline extended scenario. It is merely when we arrive at the gates of hell that differs (by about 15 years). So which scenario is more plausible? Here are a few factoids to help you decide. Current law requires:

– Medicare to slash physician fees by 25 percent next January (under the BBA).

– Additional (Obamacare-required) cuts to physician fees so severe that by 2030, Medicare will be paying doctors 60 percent less than private health insurance plans (and nearly one-third less than Medicaid pays!).

– Obamacare-mandated reductions in payments to hospitals so drastic that hospital prices for both Medicare and Medicaid will be around half those paid by private health insurers by the year 2040.

– Eventually, payment reductions to hospitals will mean they are paid 61 percent less by Medicare and Medicaid than by private health insurers; physicians eventually will be paid 74 percent less under Medicare than private insurance.

What will the consequences be? Well, the Medicare actuary projects 15 percent of Part A providers (e.g., hospitals and other institutional providers) will have negative margins by the year 2019 and 40 percent will be in the red by the year 2050. That is, they will be at risk of insolvency. Historically, doctor fees in Medicaid have been far below those of Medicare (28 percent below Medicare rates in 2008). Not surprisingly, nearly one-third (31 percent) of physicians refuse to accept any new Medicaid patients versus 17 percent for Medicare. So what do you think will happen to seniors’ access to care once Medicare starts paying physicians less than what Avik Roy has labeled “America’s worst health care program”?

As Conover notes, this will likely lead to significant access problems for Medicare and Medicaid patients. And what’s going to come next? Just as they have time and again, Congress is almost certain to respond to the political pressure: “Thus, unless Congress fundamentally changes its current practices or character, it will find a way to bypass the legislatively prescribed draconian cuts mandated by the Affordable Care Act, in which case the cost of the law will balloon by literally trillions of dollars.” Given how restricted GAO is in terms of how they can evaluate the likely results of these policies, if anything, their cost expectation may prove optimistic.

One factor that is almost certainly being underestimated in the GAO approach, and CBO as well, is the cost to federal taxpayers of the Medicaid expansion. Consider what we’ve seen play out in reaction to Arkansas’ deal with HHS – as predicted, other states have joined in rapidly:

The Arkansas legislature did not want to expand Medicaid for those under 133 percent of the federal poverty line, an option under the Affordable Care Act. Instead, it wanted to use billions in Medicaid funding to buy private insurance for that same population.

To the surprise of many (including Beebe), the Obama administration approved, in concept, the idea.

That was just three weeks ago. Now, by my count, there are four other states considering the Arkansas approach: Florida, Ohio, Louisiana and Maine. … There’s even some chatter about pursuing such an option in Texas.

It’s hard to underscore how much Arkansas’s simple suggestion — that it be able to use Medicaid dollars to buy private insurance for the expansion population — has the potential to change the face of the Affordable Care Act. If these four states signed onto the Medicaid expansion through the Arkansas option, the Urban Institute estimates that 2.4 million people would gain health insurance coverage. That works out to about 15 percent of the overall Medicaid expansion population that Urban expects to gain coverage under this part of the health care law.

If states like Louisiana indeed pursue this option, it would provide a much better care outcome and would lay the groundwork for major future changes to Obama’s system. But it also would explode the deficit even more considering the costs of subsidizing private insurance vs. Medicaid, and considering how much more attractive that insurance will be when it comes to calculating the take-up and woodwork effects. When it comes to deficit spending, you get the feeling we’re only beginning to understand the broad nature of Obamacare’s impact.

— Benjamin Domenech



Using numbers from Kaiser and the Urban Institute, The Heritage Foundation modeled out the impact on state costs through 2022. We turned it into a useful shareable map.

Does your state benefit from President Obama’s expansion of the Medicaid program, or does the expansion just put you on the hook for millions or even billions in new taxes to pay for money presented as “free”? This map, built on numbers from the left-leaning Urban Institute modeled forward by the right-leaning Heritage Foundation, presents the amounts each state is expected to have to come up with under the Medicaid expansion over the next ten years. States in green are on the hook for more in taxes – states in blue aren’t. Mouse over the state to see the amounts, and click to see a graph of the costs going forward.

The Wall Street Journal editorializes on this subject, pointing out states that enact the Medicaid expansion are unlikely to be able to reconsider in future years:

The Republican Governors of Arizona, Florida and Ohio who helped lead the constitutional challenge to ObamaCare but have since decided to expand Medicaid have a problem. They need to persuade their skeptical Republican legislatures to pass bills endorsing their flips, and now they’re searching for any legal alibi in a storm.

One of their main claims, advanced by Ohio’s John Kasich and others, is that states can change their minds later. Expand Medicaid today and pocket the 100% funding Washington is dangling in front of them for a time, but include so-called “sunset” clauses that would rescind the new coverage if Medicaid proves too costly or if the feds renege on their free-money promises. …

The Supreme Court said this coercion was unconstitutional. But unfortunately for Mr. Kasich and his fellow flippers, Chief Justice John Roberts and six of his colleagues did not stipulate a right to leave Medicaid at any time when they rewrote ObamaCare. They merely ruled that the threat to take away all federal funding if states did not join new Medicaid violated the Constitution’s separation of powers.

New Medicaid is “a shift in kind, not merely degree,” Chief Justice Roberts wrote. The High Court’s precedents say Congress can attach conditions to federal funds, akin to a contract, but Congress cannot use the spending power to force states to sign it. So while Congress can’t commandeer the states to do its bidding, it can offer them more or less any bargain it likes and states have the choice to voluntarily accept the terms or not. In the case of new Medicaid, the states can now freely take the contract as originally offered: accede to the new program, the free money and the lack of an opt-out clause.

The three-page Bricker memo nonetheless claims that states can enter and then leave Medicaid as long as they make such a stipulation when they first enter. Florida Governor Rick Scott is claiming his state will join only for three years and then revisit the decision if it’s not working well.

But there’s no evidence in the original law or the Supreme Court opinion that states can join or leave at their own whim. The logic of Justice Roberts’s opinion suggests that once states adopt new Medicaid, the program immediately becomes the old program for the purposes of the law and then states can’t leave.

The NCPA has more.

SOURCE: Heartland Institute


Grace-Marie Turner and Avik Roy note Medicaid’s access problems will get worse as more doctors drop out.

Coverage is not the same thing as care. In 2011, 39% of office-based physicians in Tennessee did not accept new Medicaid patients. That’s the fifth-worst ratio in the country, only behind Connecticut (39%), Florida (41%), California (43%), and New Jersey (60%). The main reason is Medicaid’s chronically-low payment rates. Nationally, for every dollar a primary care receives from someone with employer-sponsored insurance in 2008, Medicaid only paid 52 cents.

The ACA provides for a temporary two-year increase in Medicaid payments for primary-care physicians, but few observers believe that this temporary increase will lead physicians to increase their participation in the program.

And Tennessee will be exposed to higher Medicaid costs when Washington recalculates its matching payments:

While the lure of the 100% match in federal funding tempts states to expand Medicaid, Tennessee will pay a high price for the expansion. According to a 2011 congressional report, the ACA’s Medicaid expansion would cost states at least $118 billion over the next ten years. Once millions more people are enrolled in Medicaid, history teaches that it is nearly impossible to contract.

And there is no guarantee these high federal matching rates will continue. In outlying years, the federal government will attempt to reduce entitlement spending by reducing its matching payment for the expansion. Indeed, President Obama proposed doing just that in his fiscal-year 2013 budget, which would have reduced Medicaid spending by $100 billion over ten years. HHS Secretary Sebelius’ assurances that the match won’t be reduced have no force of law and cannot influence future congressional policy.

In addition, many states have made extra money from their Medicaid programs by taxing providers and insurers for participating in the program. These accounting gimmicks will almost assuredly be prohibited in future federal budget negotiations, leaving states on the hook for more Medicaid spending.

SOURCE: Galen Institute


While they’ve got until May to get it through, this could be harder than Gov. Rick Scott had hoped:

Florida GOP House Speaker Will Weatherford declared in an interview that the prospect of Medicaid expansion in his state is “dead” – regardless of any additional lobbying from Gov. Rick Scott.

“I think based on where the membership is today, the votes are not there to expand Medicaid no matter what the governor says,” Weatherford told POLITICO on Saturday at the Conservative Political Action Conference. …

Railing against what he called “cartel federalism,” Weatherford said states must resist the temptation of seemingly free federal dollars.

“States are being lured, and I would argue coerced, into expanding programs like Medicaid and passing regulations not through federal mandate but with the promise of free money,” he said. “They’re trying to buy us off, one by one.”

To applause, he declared: “But I am not buying it, Florida will not buy it and America should not buy it.”

SOURCE: Politico


This is looking like a raw deal:

Initially, unions were supposed to be exempt from the Cadillac tax until 2018, while expensive plans for nonunion workers would be taxed starting this year. Exempting just unions from the tax would cost an extra $60 billion during Obama-care’s first few years of implementation. But rather than appear to do an expensive favor for just one key special interest, Democrats delayed the tax for everyone until 2018.

The problem for unions is that 2018 isn’t that far off. Five years may seem like a lot of time to lobby for another exemption, but union members have to agree to employment contracts years in advance. The Cadillac tax has already become a collective bargaining sticking point. This is especially true for public-sector employees, who typically have much pricier health care plans than nonunion workers. Public-sector unions may be the last sector of the workforce where it is common for employees to not have to contribute anything towards their health care, and the Cadillac tax will make it much more difficult for taxpayers to continue footing the bill.

This is poised to wreak havoc at the state level. In Pennsylvania, teachers in 168 of the state’s 500 school districts are working without contracts, and by the fall a majority of districts could be without contracts. Most of the negotiations in the state reportedly hinge on reining in health care benefits, rather than salaries. “District negotiators fear if unions do not make concessions now, an excise tax called for in the Patient Protection and Affordable Care Act, signed into law by President Barack Obama in 2010, could cost districts thousands starting in 2018,” reported the Scranton Times-Tribune earlier this month.

The other problem is Obama-care’s sticker shock. In the runup to the law’s passage, the White House was dismissive toward anyone who claimed the law’s morass of new rules would raise insurance premiums. Now no one really denies this is happening. Even though the Cadillac tax’s $10,200 and $27,500 premium thresholds were seen as defining exorbitant insurance plans, plans that don’t offer lavish benefits are becoming expensive enough to be subject to the tax.

In Massachusetts, which has the highest average health care costs of any state thanks to the Bay State’s own misguided experiment expanding health care coverage, over half the state’s employees will be subject to the tax, according to a report by the Pioneer Institute. The report goes on to highlight that the tax is particularly punishing for middle-income public employees in Massachusetts. From 2018 to 2028, a police officer on a typical family plan will be subject to an extra $53,907 in new taxes. A teacher on an individual plan will owe an extra $20,807. Even granting that the problem is acute in Massachusetts, it’s safe to assume the Cadillac tax is going to cause turmoil across the country between public employees who have become accustomed to gold-plated health packages and taxpayers who are increasingly unable to pay for them.

SOURCE: Weekly Standard


Paul Howard on the program and why liberals should like it:

Conservatives like Part D because private plans bargain with drug companies over prices and then compete with one another for senior citizens’ business. Lower premiums attract more enrollees, leading to more profits for insurers and lower costs for taxpayers. Competition and consumer choice help keep costs down.

Part D has features liberals love as well. Coverage is subsidized so that the lower-income elderly pay little or nothing for drug coverage, and wealthier seniors pay somewhat more. Medicare also defines the standard benefit all plans must cover, so competition is focused on price, specific drug coverage and the convenience that pharmacy-network plans offer.

The result: Medicare Part D has cost more than 30 percent less than initially projected by the Congressional Budget Office in 2004 – $304 billion compared with $449 billion.

Part D plans also control costs by making broad use of generics. In cases where a substitute to a brand name was available, the generic was dispensed almost 93 percent of the time. A 2010 CBO study estimated that generic substitution reduced Part D spending by $33 billion in 2007 ($24 billion of that savings accrued to taxpayers).

Part D premium costs to seniors have basically stayed flat in recent years, and the Centers for Medicare and Medicaid Services, the agency that oversees the program, predicts a 4 percent decline in premiums in 2014 as drug costs fall. …

Part D’s emphasis on market pricing strikes the right balance between preserving affordability and spurring investment in pharmaceutical innovation. When patent protection expires for branded drugs, prices plummet and stay low. This allows society to reap far more of the benefits of medicines in the long term than they cost in the short term. Lipitor, which once cost dollars a day, is now pennies a day. …

Unfortunately, President Barack Obama wants to reap Medicare savings from Part D by imposing mandatory rebates – that is, price controls – on drug companies that participate in the program. (The rebates amount to price controls because they limit the prices manufacturers can charge government programs relative to prices companies charge in the private market.)

To be fair, this would (at least for the moment) apply only to seniors who receive both Medicare and Medicaid coverage and some other low-income elderly. And this approach has also been endorsed by the bipartisan National Commission on Fiscal Responsibility and Reform.

Although price controls lower government spending in the short term, they also create long-term problems. The CBO estimates that applying automatic Medicaid rebates to Part D’s low-income population would reduce federal spending by $137 billion over 10 years. But lower revenue for manufacturers also translates into reduced incentives for future medical research and development, fewer jobs in the sector and higher prices to payers outside the favored government programs (that is, private insurers and employers).

Far better to stick with the pricing model that has made Part D such a successful, and comparatively affordable, program to date.

SOURCE: Bloomberg View

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