The Unaffordable Care Act

Published March 27, 2013

National Review Online

As Obamacare begins to roll out, its champions are beginning to have to confront reality. But because they’re getting a lot of leeway and protection from the political press, the results of this confrontation with the consequences of the law’s poor design and misguided economic assumptions often take the form of little nuggets of truth buried in mountains of frantic, wishful obfuscation. Such was the little nugget buried in the middle of a story that was itself buried in the back of the A section of last Friday’s New York Times.

The story was about the enormous challenges of implementing the law, and while it was careful to inform us (in the mouths of unnamed “supporters of the law”) that a lot of these problems are surely functions of the fact that “President Obama has done little to trumpet its benefits, educate the public or answer the critics,” it also notes the following curious fact:

Mr. Obama scored his biggest legislative achievement exactly three years ago when he signed the Affordable Care Act. But this week the administration cautioned officials to be careful about suggesting that the law would drive down costs.

After extensive research, the administration said it was unwise to tell consumers that they could get “health insurance that fits your budget.” That message, it said, is “seen as highly motivational, but not as believable.

This makes it sound like the “extensive research” in question was research into public opinion, which it may well have been. But of course, the more fundamental reason “to be careful about suggesting that the law would drive down costs” is that no one really expects it to do so — not even the administration.

Administration officials and many others on the left who talk about slowing health costs in the coming years never really attribute that expectation in any concrete way to the new law. Rather, they point to the fact that the growth of health costs has slowed a bit during the recession and the painfully slow recovery of the past few years, and they simply expect that slow rate to continue even as they simultaneously expect the economy to recover much more robustly in the coming years.

It’s very important to understand just how much the Left now hangs on this very implausible expectation about health costs. It is at the core of the Democrats’ fiscal arguments, and at the core of their optimistic assumptions about how Obamacare will work out.

That expectation is, to begin with, what allows Paul Krugman and others (including administration officials) to suggest that we just don’t have to worry about the deficit and debt at this point because they will be pretty stable for about a decade before beginning a catastrophic rise that would crush the economy. That’s what amounts to fiscal optimism these days, and it’s the essence of the Democrats’ resistance to entitlement reform. It is embodied, for instance, in this chart that you’d find if you trudged through the president’s 2013 budget proposal all the way to the 510-page “analytical perspectives” volume that was released with the budget:

This projection, which predicts an epic disaster for the American economy if we remain on our current fiscal course in the long run, is, to repeat, a very rosy view, since it suggests we have about ten years of relative stability (if at a high level of debt) in which to change course before the steep upward trajectory of debt resumes — although the people who use this figure somehow use it to argue against changing course. But in any case, even this sorry excuse for optimism is only made possible by the notion that the growth of health costs won’t soon return to even its postwar norm, let alone to its norm of the last two decades. It assumes, for instance, that Medicare spending will only be 3.3 percent of GDP in 2020, while the Congressional Budget Office assumes it will be 4.2 percent of GDP — a huge difference. And it’s a difference that has a massive effect on medium and long-term expectations. The CBO uses somewhat less rosy assumptions (but still assumes health-cost growth will take a while to resume), and so expects federal debt to reach 200 percent of GDP not in 2080 but in 2037 — again, a huge difference, which means the CBO sees a far steeper rise in deficits and debt in the near and medium term.

But the optimistic assumptions about health-care costs have much more immediate consequences too. The relative stability projected in that chart for the next decade is simply assumed, it is not asserted to be a function of any particular reform in Obamacare. In fact, it is assumed in the administration’s expectations of how the Obamacare rollout itself will work out, and therefore allows them to skirt over two huge problems with the law’s design.

The first is that, unless health costs grow very slowly and keep the growth of Medicare costs very low, Obamacare’s additional price controls (in the form of the IPAB) would have to kick in, and, because they are only allowed to take the form of across-the-board rate cuts for providers, they would result in drastically reduced access to health care for seniors. The actuaries of the Medicare program (who work for Barack Obama) have projected that this would require payment rates for doctors in Medicare to dip well below Medicaid rates and keep falling. Here’s how they see it:

We know that Medicaid’s low payment rates cause many doctors to refuse Medicaid patients, and therefore make it difficult for many poor Americans to find health care. Taking Medicare rates below that level should have similar, but even more drastic, effects. It’s not even worth trying to think through the details of what that would look like because it would simply never happen — we’ve seen that far smaller cuts than that are undone each year through the “doc fix” and there is no way doctors or seniors would put up with such blunt across-the-board cuts and such a loss of access to care. The only way to really avoid that mess is if health costs just magically remain very low, and that’s basically what the administration (and to some extent the CBO) now project when assessing the law. The CBO assumes, for instance, that the IPAB wouldn’t even have to start doing anything at all until after 2022.

But that’s not all. The second large design problem that the rosy health-costs scenario allows the administration to ignore reaches even closer to the heart of Obamacare. After the law’s designers got their first real CBO score in 2009, they realized they had to find some way to cut the projected costs of the law’s exchange subsidies if they were to have any chance of pretending the law would cost less than a trillion dollars over a decade. So they inserted a provision that kicks in in 2018 and requires that, if the cost of the exchange subsidies exceeds 0.5 percent of GDP in any given year, the level of subsidy would be cut in a means-tested way. The provision didn’t draw much attention even from health wonks at first, but in 2011 the CBO produced an analysis of it showing that it would cause very significant declines not just in the growth of subsidies but in their nominal value year-over-year for many middle-class families. These families’ out-of-pocket costs would quickly grow larger than the penalty (or tax, for John Roberts fans) they would have to pay for not having coverage, and many could well opt to go uninsured until they needed care. (Jed Graham of Investors Business Daily has done some great reporting on this provision, especially here and here.)

Until this year, the CBO has always assumed that these families just wouldn’t drop their coverage, but in its latest score of Obamacare, the agency for the first time projects that the number of people in the exchanges will actually begin to drop after 2018, declining by almost a tenth over the subsequent five years even as the population grows. And since the people who remained in the exchanges would tend to be poorer and sicker, the costs of providing them subsidies would grow very quickly (by almost 6 percent annually), since the exchange pool would become more risky. (And this projection, remember, is still based on rosy expectations about overall health-cost growth.) This nightmare scenario, too, is pretty unlikely to happen, since the people involved would be middle-class families. They’re not going to accept the enormous downside of Obamacare without even the modest upside of exchange subsidies, and they’re not going to like being forced to go uninsured. The politics of this just wouldn’t hold.

In both cases, it is only possible to imagine that Obamacare might be sustained if we assume very low growth in health costs. That assumption is absolutely critical to liberal fiscal and health policy today. But of course, Obamacare doesn’t really offer any serious mechanism to achieve such low costs — in fact, it’s actively hostile to the kind of consumer incentives and competitive pressures it would take to achieve it.

These are just a few of the many increasingly evident reasons why Obamacare in its current form has no future. For now, you’ve got to dig pretty deep in your newspaper to see it. But it’s going to become clearer and clearer to real voters as implementation proceeds.

Yuval Levin is Hertog fellow at the Ethics and Public Policy Center and editor of National Affairs.

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