Like many health policy experts, I’ve closely followed and participated in the debate over the Affordable Care Act. I’ve spoken at town hall events, fielded questions from reporters, and discussed the ACA with students, friends, and colleagues.I have been asked a wide range of questions about the ACA, but I am always amazed by the one topic that almost never seems to come up: how the deeply indebted federal government will pay the roughly $200 billion annual cost of expanding coverage.
The inattention to the financing of the ACA by the public, the media, and even Republicans is a testament to the skill of its drafters. The benefits of the ACA are highly visible, the costs are concealed.
Consider the ACA’s treatment of Medicare hospital reimbursements. Reimbursements to hospitals increase from year to year based on the projected increase in hospitals’ labor and capital costs. The ACA reduces the rate of growth in payments by 0.1 percentage points per year plus an additional factor based on projected economy-wide productivity growth. It is possible that the application of these factors will result in a net reduction in payments, but, more likely, payments will not increase by as much as they would have in the absence of the law.
This provision, which will raise $64 billion in 2020, may result in the closure of some hospitals and reduce quality in those that remain open. However, these effects are uncertain and difficult to summarize in a soundbite.
Other financing provisions are only slightly less obtuse. About one quarter of Medicare beneficiaries are enrolled in private health plans, the so-called Medicare Advantage plans. The ACA will revamp the formula used to set payments to these plans for a savings of $19 billion in 2020. The ACA will reduce subsidies to so-called Disproportionate Share Hospitals (hospitals that serve a large number of low-income patients) for a 2020 savings of $9 billion.
The government will levy penalties on uninsured individuals ($8 billion in 2020) and large firms that do not offer a qualified plan to their employees ($15 billion). The Act imposes a 40% tax on health insurance benefits that exceed “high cost” thresholds, initially $8,500 for an individual plan and $23,000 for a family policy ($22 billion).
Earned income over $200,000 for individuals and $250,000 for joint filers will be subject to an additional 0.9 percentage point Medicare hospital insurance tax. Employers will collect the tax, reducing its salience for taxpayers. The 2010 Health Care and Education Reconciliation Act provides supplementary funding for the ACA in the form of a 3.8% tax on unearned income for taxpayers with adjusted gross income over $200,000 for individuals and $250,000 for joint filers. Together, these provisions will raise $41 billion in 2020.
Medicare device manufacturers will be subject to a 2.3% excise tax on their sales ($3.3 billion). Tanning salons will pay a new 10% excise tax ($200 million). The Act imposes new fees on pharmaceutical companies ($2.6 billion) and for-profit health insurers ($13 billion). It limits flexible spending plans to $2,500 annually ($2.8 billion) and the tax deductibility of health care expenditures ($2.7 billion).
Many of the funding sources entail hidden costs and distortions. Some may prove politically untenable and be suspended, unenforced, or scaled back, placing additional pressure on the federal budget. Already, the Obama administration has delayed the penalty for employers that do not offer qualified insurance plans to employees and put off reductions in subsidies to Disproportionate Share Hospitals.
Given the number and complexity of the ACA’s financing provisions, it is not surprising that conservative attacks focus on issues like implementation that are more likely to resonate with the public. But the fiscal burden of the ACA is not like a monster in the closet. Ignoring it won’t make it go away.
David H. Howard, PhD is a faculty member in the Department of Health Policy and Management at Emory University, with joint appointments in the Department of Economics and Winship Cancer Institute. He is currently a member of CMS’s Medicare Evidence Development & Coverage Advisory Committee and chairs the advisory board of the National Living Donation Assistance Center.