When he was seeking passage of the Affordable Care Act, one of the things President Obama really wanted to be able to say was that his plan didn’t increase the deficit. So the law was designed to hold down explicit spending by relying heavily on mandates and cross-subsidies to get people covered without direct government outlays. That choice is causing a lot of the political headaches the president is facing today.
Obamacare’s explicit funding sources are mostly new taxes on people with high incomes and cuts to Medicare provider payments. But some of the “shadow fiscal policies” in Obamacare are effective tax increases on people with moderate incomes; these people didn’t expect to face a tax increase under Obamacare, and now that they’re discovering they are, they’re getting angry. This is another example of the closing wonk gap: Members of the general public figuring out facts about Obamacare that policy wonks on both sides of the debate have known for years.
Obamacare relies heavily on cross-subsidies as it greatly expands the market for individually purchased health insurance. Premiums in this market will be tightly regulated so young and healthy people pay more than they’re expected to get back in claims, and older and sicker people pay less. This is a tax, of sorts, on a subset of young and healthy people that goes to finance health care for people who need more of it. And the individual mandate is designed to make sure they pay the tax, one way or another.
Shadow fiscal policy in health care is not a new innovation. The government has long used subsidies, mandates and regulations to coerce private actors into buying health care and into making cross-subsidy payments to each other. The group health insurance market is basically one big cross-subsidy scheme. But those cross-subsidies have evolved over time and are well-concealed. Until recently, employer payments for health insurance haven’t even appeared on W-2 forms. The new cross-subsidies in Obamacare are much more readily apparent in the form of premium increases for specific people.
The law’s supporters understand this, at least implicitly. They talk about the importance of young and healthy people buying health plans through the Obamacare exchanges. Why is it so important that these people participate? It’s because we need them to make their cross-subsidy payments for the system to work.
And yet those supporters tend to talk about the law as though it’s not creating any losers. The old, cheaper insurance these people had through the individual market was junk insurance, we’re told. Well, sometimes it was, but often it wasn’t. Insurance for the young and healthy isn’t only cheap if an insurer intends to rescind it whenever someone gets sick. In a lot of cases, these people were simply enjoying the good fortune of being a low, easy-to-underwrite risk, and the implicit tax structure in Obamacare is taking away the good deal they once enjoyed.
So what should you say if you think (as I do) the Affordable Care Act is a positive change to health policy on net even as it makes a few million people worse off? A few options:
1. This losing group is outstripped by a much larger group of people made better off by the law. “Winners” include people who didn’t have health insurance before and will now be able to afford it through the exchanges; people with very low incomes who are now becoming eligible for Medicaid; older people or people with pre-existing conditions whose premiums are going down because of risk pooling; and people whose coverage did not cover services they needed, like maternity care.
2. The main people the old individual insurance market was failing weren’t the approximately 15 million getting coverage through it, but the nearly 50 million who were going uninsured because the market did not meet their needs. The new market will be better for them.
3. The group of winners under Obamacare can be even larger if the federal government gets healthcare.gov working properly and recalcitrant states agree to take the Medicaid expansion.
4. Tweaks to the law could improve the lot of people on the “loser” side of the ledger, particularly people who make just over 400 percent of the poverty line and therefore just miss eligibility for premium subsidies. A single young adult making $50,000 a year freelance isn’t struggling, but it probably wasn’t the best idea to design the law so his or her health insurance premium goes up markedly to pay for coverage expansion elsewhere. Cost cuts elsewhere (for example, a modest restriction on the tax exclusion for employer-sponsored health insurance) could pay for expanded insurance subsidies for middle-income people who are currently left out.
And in the long run, my hope is that politicians will learn the lesson that shadow fiscal policy is not necessarily politically easier than explicit fiscal policy, and take their future expenditure programs on-budget.