Phillip L. Swagel
Senior Fellow; Professor, University of Maryland School of Public Policy
Banking and Capital Markets and Global Economy and Public Policy and Real Estate and Regulation and U.S. Economy
Dr. Phillip L. Swagel is a professor at the University of Maryland School of Public Policy, where he teaches classes on international economics and is an academic fellow at the Center for Financial Policy at the university's Robert H. Smith School of Business.
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The cost of affordable care
By: Phillip L. Swagel
June 28, 2012
In upholding the individual mandate at the heart of the Affordable Care Act (ACA), the Supreme Court in effect declares that a mandate is only as binding as the consequence for not complying. In the case of the ACA, the consequence is modest: a "financial penalty" (as the majority opinion written by Chief Justice John Roberts puts it) of $750 dollars in 2016 for most people not obtaining health insurance. In this sense, the mandate is hardly mandatory. No one would be happy to pay a fine of $750, but this amount is not nearly enough to be seen as compulsory for most American families.

The tax-based outcome to the case presents some awkwardness for President Obama, who in 2009 said about the ACA that aEURoeYou canaEUR(TM)t just make up that language and decide that thataEUR(TM)s called a tax increase.aEUR? Still, this reversal pales next to the relief of having the statute pass the final judicial review. Ironically, there would have been little doubt about the constitutionality had the administration embraced tax policy as a way to implement the mandate. The Act could have specified, for example, a $750 refundable tax credit for individuals who purchased health insurance, effectively levying a $750 tax penalty on those who went without. Of course, this alternative also would have been awkward given that the Obama campaign had vigorously criticized a similar proposal from Senator John McCain during the 2008 campaign.

A further awkward tax-related note for the President is the calculation by the Congressional Budget Office that more than three of four people projected to pay the financial penalty for not having insurance will have an income less than five times the poverty levelaEUR"not much more than $115,000 for a family of four and thus within what most Americans would consider the broad middle class or below. This outcome is not a surprise: after all, those most likely to pay the tax will have moderate incomesaEUR"too little to want to pay for insurance even with the subsidies made available through the ACA. Still, this rests uneasily with the PresidentaEUR(TM)s pledges not to raise taxes of any sort for families making less than $250,000 per year.

While the law will go forward without legal uncertainty, there are still important hurdles for the Affordable Care Act. A chief concern with its implementation is how will the state-based health exchanges -- through which many people are meant to purchase health care and receive government subsidies-- function. These exchanges are in varying stages of development across states, but share the common feature of brobdingnagian complexity in seeking to connect information from individuals, employers, the tax system, government subsidies, and private health insurers. Under the best of circumstances, there will be bumps before exchanges get to the point at which individuals can obtain insurance with the benefit of government subsidies. One need only recall the initial difficulties from the 2006 implementation of the drug benefits added to Medicare in 2003. Exchanges are orders of magnitude more difficult. Adding to the difficulty is the reality that several states have chosen not to participate, leaving the federal government with the task of implementation, not just oversight, in order for the main expansions of coverage in the Affordable Care Act to launch as scheduled in 2014.

The fiscal sustainability of the Affordable Care Act may be even more. In broad strokes, the Act provides new insurance coverage to tens of millions of Americans and subsidies to many others who now have insurance through their employers but in the future will shift to policies offered through the state exchanges and subsidized by the federal government. The financing of this coverage expansion is less straightforward, with the bulk consisting of taxes on high-cost health plans that are not set to take effect until far in the future, reductions in payments to Medicare Advantage plans that have been largely delayed because of their unpopularity, and future reductions in payments to providers such as doctors and hospitals that are seen as unsustainable by experts such as the Medicare chief actuary. In other words, it is unclear if any of these sources of revenue will actually materialize.

Other costs are hidden. For example, the Act provides for a temporary increase in reimbursement rates for doctors who treat Medicaid patients, but these funds must eventually be made permanent to avoid a situation in which the Affordable Care Act leaves millions of people with Medicaid coverage but not doctors willing to treat them. Similarly, certain overpayments in Medicare are reduced and used to pay for the ACA, but existing underpayments (such as the so-called "Medicare doc fix") are left unaddressed. Other resources to pay for the ACA come from a variety of taxes, including ones on medical devices, operators of tanning parlors, and on some investment income. The common feature: all of these levies are unpopular and thus likely targets for repeal in the future. The tax on medical devices, for example, has already come under attack by Members of Congress from both parties. It is not difficult to view the ACA as nearly an unfunded expansion of health insurance coverageaEUR"a laudable goal, to be sure, but one that makes even more difficult the already-steep fiscal challenge facing the United States.

The expansion of coverage through Medicaid is another source of vulnerability for the sustainability of the ACA. The federal government is set to pay for all of the incremental costs for a few years to states from adding Medicaid recipients and then for the bulk of incremental costs going forward. To cash strapped states, however, even partial costs might be undesirable. The Supreme Court ruling allows individual states to reject the expansion of Medicaid coverage. Such steps would not threaten the financial sustainability (actually, the reverse), but would lessen the effectiveness of the new health care law in moving toward universal health insurance coverage.

The Supreme Court decision removes the legal uncertainty hanging over the Affordable Care Act. Between now and 2014, when most of the new insurance coverage will start, Americans will learn whether the Act is viable financially.