In the latest year-end budget bonanza, Congress repealed three taxes imposed by the Affordable Care Act (ACA) to pay for expensive health benefit expansions. These taxes join several of the ACA’s other unpopular “pay fors” that have fallen by the wayside since enactment in 2010. What’s left of the law are its entitlement commitments, weak and hesitant cost-control ideas, and revenue provisions which are insufficient to fully offset the added federal spending.
The law’s authors promised a different outcome. Ten years ago they said the ACA would improve the government’s fiscal outlook, not worsen it. The Congressional Budget Office provided confirmation when it estimated the law would produce deficit reduction of $143 billion over ten years and between 0.25 and 0.50 percent of GDP ($0.7 to $1.3 trillion) in its second decade.
Critics at the time contended that the ACA’s spending provisions would prove durable and irreversible, while the offsets, passed without bipartisan support, would wither and die under political pressure and heightened scrutiny. That is exactly what has occurred.
First to go was the hopeless long-term care program appended to the ACA, called the CLASS Act, which was sold as a revenue raiser but in reality was a federal bailout in waiting. CBO estimated this program would produce a ten-year $70 billion windfall because premiums would be collected well in advance of paying benefits. The program was killed before liftoff because actuarial assessments caught up with commonsense. The CLASS Act was a new benefit program that promised far more than it could deliver while posing as a means of financing the ACA. Its inclusion helped pave the way for the law’s enactment by Congress but it was never going to produce a surplus to offset the costs of the ACA’s other benefits.
Next on the chopping block was the ACA’s Independent Payment Advisory Board, or IPAB. The IPAB was supposed to remove difficult cost-cutting choices from Congress by empowering an impartial and apolitical group of experts. The new panel would have full authority to slow cost escalation in Medicare on an annual basis, with or without further legislative consent. CBO said its creation would cut federal costs by $15.5 billion over ten years. Republicans complained the new panel was unaccountable to voters and usurped the legislative authority reserved to Congress by the Constitution; quietly, many Democrats agreed. Tellingly, President Obama never nominated anyone to serve as IPAB members, and it was repealed in a bipartisan budget deal signed by President Trump in 2018.
The argument, made frequently in 2009 and 2010, that expanded enrollment in insurance would allow the government to cut back on subsidies for uninsured patients also has been disproven by events. A primary payment mechanism for supporting the uninsured — disproportionate share hospital (DSH) payments in Medicaid — was trimmed modestly in the ACA, saving $14.0 billion over ten years according to CBO. After 2010, however, the hospitals that had supported the ACA’s enactment turned around and lobbied furiously to kill the DSH provision. Congress now has delayed its implementation until at least May of next year, with a high likelihood that the provision will eventually be repealed.
The three taxes Congress terminated in the latest deal — on high-cost insurance plans, insurers more generally, and medical devices — were critical to CBO’s initial ACA projections. At enactment, the taxes were projected to produce $112 billion in revenue over ten years. Most of that was never collected because of a series of delays and reprieves passed in the years after 2010. The Joint Committee on Taxation estimates full repeal will reduce revenue by $373 billion over the coming decade.
That’s only a small part of the story, however. Congress designed the tax on high-cost — i.e. “Cadillac” — insurance plans to produce ever larger amounts of revenue over time. It did so by indexing the thresholds used to assess what is “high cost” to consumer inflation even though plan premiums for employer coverage would grow with health expenses. With each passing year, more companies would face the choice of cutting costs, or paying the tax. Either way, the government would receive more revenue because employers cutting costs to avoid the tax would shift their mix of compensation from untaxed fringe benefits to taxable wages. Congress’ decision to include the Cadillac tax in the ACA is an important reason CBO forecast significant deficit reduction in the law’s second decade.
There have been changes since the ACA’s enactment in 2010 that have gone in other direction too, toward reduced federal costs. The Supreme Court ruled that the ACA’s Medicaid expansion was optional, not compulsory, for the states. The result is an expanded Medicaid program in most of the country, but not in fourteen states that have opted out. Also, in 2017, Congress repealed the law’s tax enforcing the individual mandate, which is reducing the number of people signing up for subsidized coverage in the ACA exchanges and for Medicaid too.
ACA advocates also point to a general slowdown in Medicare and Medicaid spending since 2010 and suggest that the law’s added costs are lower as a result. While it is impossible to definitively disentangle all of the reasons CBO’s baseline projections were too high in 2010, there’s no reason to believe the ACA was the cause. There are far more plausible explanations, including a much longer-term trend toward lower costs for patients with heart disease, which CBO did not foresee in 2010. Further, while the public insurance programs have grown less rapidly than previously expected, the ACA did not usher in an overall slowdown in cost pressures, as was promised by its advocates at enactment. On a per capita basis, average annual real growth in health spending from 2010 to 2018 was 2.0 percent, up from 1.8 percent from 2003 to 2010.
What is known for certain is that the ACA is proceeding along a familiar path. After enactment, many key provisions that were said to make it affordable have either been repealed or are producing less savings than forecast in 2010. Meanwhile, the law’s spending commitments are going nowhere, with plans for their further expansion now well underway. All of this is the predictable result of a deformed political culture that leads ordinary voters to think they can get ever-more expansive governmental benefits with only the very rich paying for the added expense.
James C. Capretta is a RealClearPolicy contributor and a resident fellow at the American Enterprise Institute.
