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Paying for the ACA: A Field Guide

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.

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