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Congress Can Fix the ACA With These 3 Principles

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Congress Can Fix the ACA With These 3 Principles

November 10, 2014

The Affordable Care Act presents the incoming Congress with substantive and political challenges. On the one hand its widely-acknowledged problems warrant repair, and the electorate has made its displeasure with it loud and clear. On the other hand, the whole ACA will not be repealed while there is power-sharing between a Republican Congress and a Democratic administration. Consequently this Congress will need to be very clear-sighted about what it can fix and what it cannot. 

I do not pretend to have all the answers to questions that are as much tactical as they are substantive. However, I suggest that three foundational principles guide the new Congress’s approach to the ACA.

Principle #1: Fixes should address clear substantive problems. There is no shortage of these, evidenced by the fact that the law’s sponsors have repeatedly concluded that the law cannot be safely implemented as originally written. With so many substantive problems in need of repair, Congress need not waste energy debating symbolic or ineffectual measures. 

Principle #2: Fixes should improve the law’s finances or at least not worsen them. This is important. The ACA encompasses a vast expansion of federal health spending obligations, financed by a number of controversial savings measures and new taxes. It would be tempting but irresponsible to worsen fiscal problems by selectively attacking its controversial financing measures while leaving its spending provisions intact. This does not mean that various savings and tax provisions should not be repealed, but such actions are best accompanied by cost reductions.

Principle #3: Reformers should begin with fixes that can attract bipartisan support. Again, there is no shortage of these; many ACA provisions are opposed on both sides of the aisle. This is simple realism given that the president supports the ACA and will not sign its repeal. The ACA’s supporters committed a huge tactical blunder in 2010 by pushing the law through in a manner guaranteed to unite the opposition party against it. Those who want to fix problems with the ACA should avoid repeating this mistake in reverse when bipartisan options are available.

Below is an incomplete list of the law’s major provisions, as well as some subjective guesses on how they fit into these various categories. Other experts may disagree with my reads on them.

 

 

Some comments on each category:

Health exchange subsidies. The structure and expense of these subsidies are probably the biggest substantive problems with the ACA. They represent an unaffordable addition to federal health spending obligations, are highly susceptible to costing more than projected, and are driving workers out of the workforce. Unfortunately there is not yet a bipartisan consensus on fixing this. In the near term the best Congress may be able to do is to build understanding of why at least some targeted fixes are necessary to avoid driving labor force participation down still further.

Medicaid expansion match rate. The ACA’s other huge unaffordable cost increase is its Medicaid expansion. Cost is not the only problem with it; the expansion match rate is creating severe inequities. For example, the ACA offers much more generous federal matching support (90 percent of costs over the long run) for a childless adult with income at 130 percent of the poverty line, than to a pregnant woman at 65 percent of the poverty line (57 percent of costs on average). The expansion is likely to further constrain access to Medicaid services for those in greatest need. At this time there is no bipartisan consensus to roll back the expansion match rates creating these inequities but sooner or later federal and state lawmakers must confront them.

Medicare spending growth cuts. The ACA’s Medicare spending growth cuts are large and hugely controversial. That said, lawmakers must remember that the problem lies not with the cost containment itself—necessary in any event—but with the ACA’s spending the proceeds on a new entitlement. Whether the ACA represents the best approach to controlling Medicare costs is debatable; still, if these provisions are repealed, to keep Medicare viable Congress will need to pass an alternative that saves every bit as much if not more. Repeal of these provisions would also increase the risk that this portion of the Medicare financing shortfall will eventually be filled with tax increases.

Employer mandate. The ACA requires that certain employers offer “affordable” coverage to certain employees or face a penalty. This is a problematic policy and has drawn increasing opposition from left-leaning advocates as well as those on the right. While repeal might attract some bipartisan support, it must be remembered that the ACA’s finances depend on revenue from these penalties—$106 billion through 2022. These penalties would best be replaced by cost reductions of an equal or greater amount.

Individual mandate. The ACA also requires that individuals carry health insurance coverage or pay a penalty. The ACA’s supporters are more wedded to this provision than to the employer mandate, so repeal would likely attract less bipartisan support. The same fiscal principles apply; repeal would best involve replacement with an equal or greater amount of spending reductions.

Medical device tax. This provision is deeply unpopular and has been the subject of strong bipartisan votes for repeal. Unlike other controversial ACA tax increases the rationale for this tax has never been clear. It is true that much health cost inflation derives from the adoption of new technology, thus taxing such technology to slow its adoption might possibly reduce cost growth; nevertheless it seems a strange policy choice to contain costs by inhibiting Americans’ access to technological advancement. Again the same fiscal principles apply; this tax is a natural target but it is best replaced by cost savings of equal or greater magnitude.

Independent Payment Advisory Board. This is an obvious early target for repeal. The unelected IPAB is unpopular on both sides of the aisle and as of this writing there is little indication it ever would become operative anyway. Given that it is highly unlikely to ever produce a penny of savings, it can be repealed without probable fiscal damage.

Risk corridors. The ACA contains a controversial provision to provide federal financing support for health exchange plan sponsors whose plans lose money due to causes such as adverse selection. CBO has scored this provision as having no costs (even slight savings) but I am skeptical; the estimate is based on prior experience with Medicare’s Part D prescription drug benefit, which involved a different risk pool. Congress could take a number of approaches to modifying these risk corridors, including tighter certifications of budget neutrality, requiring timely repayments from recipient companies, imposing TARP-style restrictions on recipients, and outright repeal. Though the politics of these options are unclear, this is an issue with bipartisan potential as it allows legislators to prioritize the interests of taxpayers over those of health insurance companies.

Cadillac plan tax. The Cadillac plan tax will only become more controversial as we near its 2018 effective date. It is bad policy, though it has the upside of undercutting the historical tax preference for employer-provided insurance. If repealed, it should be replaced by a better policy such as lessening or eliminating that tax preference.

Unearned Income Medicare Contribution. One of the biggest problems with this new tax on high-income Americans is that the income threshold is not indexed; thus over time more and more Americans (80 percent within 75 years) would be subjected to it. At the very least this indexation issue will need to be addressed at some point, though again any revenue foregone is best replaced with spending growth reductions.

The ACA contains myriad problems; these and other provisions will come under increased scrutiny going forward. As lawmakers approach repairs, they will need to bear in mind what is politically achievable as well as what is fiscally responsible.

 

UPDATE: Marc Goldwein of the Committee for a Responsible Federal Budget points out that CBO has actually scored repeal of the individual mandate as reducing the deficit. That’s important to know as Congress contemplates next steps, and it also provides some interesting food for thought.  CBO expects that repealing the individual mandate will save money because repeal will cause fewer people to sign up for the health exchanges and Medicaid, thereby reducing the cost of the ACA’s coverage expansion considerably.  Essentially CBO has concluded that the mandate is powerful enough to induce many Americans to sign up for subsidized insurance, but not big enough to generate substantial revenue.  Or, in other words, that the ACA’s individual coverage mandate is itself creating a substantial new cost for the federal government.  CBO’s analysis is highly contingent upon assumptions; if on the other hand the mandate is a less powerful inducement than CBO projects, then the additional subsidies it triggers would be less and the penalty revenue it generates will be greater.  It should also be mentioned that if lawmakers ultimately roll back the Medicaid match rate and the total cost of the exchange subsidies as fiscal realities should ultimately require them to do, then the mandate will create fewer costs and provide higher revenue than now projected.

 

Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21.

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