The Supreme Court Ruling And The Budget

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Friday, June 29, 2012

By Joseph Minarik, Senior Vice President and Director of Research, Committee for Economic Development; Member, BPC's Debt Reduction Task Force

This blog post was originally published on "Back in the Black," the blog for the Committee for Economic Development's Fiscal Health Initiative.

For a short while, there was a very loud budget buzz about the Supreme Court case on the Patient Protection and Affordable Care Act (PPACA, sometimes known as “Obamacare,” which like “Bush Tax Cuts” is too close to a partisan epithet for this space). The conventional wisdom was that the Court would strike down the so-called “individual mandate” (the requirement that individuals either purchase health insurance or pay a penalty) as unconstitutional. It turns out that the Congressional Budget Office had estimated that striking the mandate would save the federal government money (see here). Health insurance would be more expensive, and the government would not collect penalties from those who refused to purchase insurance, both of which would increase the deficit. But on the other hand, fewer people would receive coverage under Medicaid, fewer would use federal subsidies to buy insurance, and there would be less tax-deductible spending on insurance. The budget savings would be greater than the costs on net. So naturally, Washington was atwitter over how to spend the windfall from the expected Supreme Court ruling; eliminating the automatic sequester of defense spending was the leading candidate.

But we have been spared that decision. Instead, we have a fairly straightforward change (or lack thereof) to the existing cost estimates. The Supreme Court did make one change to the operations under the PPACA. It has allowed the states to opt out of the expansion in the Medicaid program, which would have been heavily subsidized by the federal government – totally through 2016, and phased down to 90 percent by 2020 and thereafter. The presumption now is that almost all states will accept the money to get coverage for their low-income populations, if only to avoid the appearances that would arise from not doing so. That yields virtually no change to the pre-existing budget estimate. (With the emphasis on “estimate” – more later.) A decision by any state to refuse to accept the federal money will reduce federal outlays, but with few states expected to do so, the new estimated outcome will be very little less than, or equal to, the prior forecasts.

There is a contrary view. If many states opt out of the program, and send the people therefore denied Medicaid to the health-insurance exchanges to purchase insurance with federal subsidies, the federal budget cost could increase. But how many states will refuse the largely federally financed Medicaid expansion, and how many very low-income people will then buy insurance (persons at the margins of affordability are excused from the mandate and the penalty)? No one yet knows, though the numbers are likely small.

That uncertainty highlights that these are only estimates, and that the budgetary stakes could be large. Because we were just talking about the states, let’s start with the uncertainties there.

A key substantive complaint of the states about the Medicaid expansion was that the supply of providers – physicians and hospitals – who are willing to treat the Medicaid population at the current low reimbursement rates already was extremely tight. States expressed concern that eliciting additional providers to enter that market could require paying higher prices. In possible confirmation, one financial market economics shop reacted to the Court decision by repeating their belief that the large stock-market-listed firms that deliver care to the Medicaid market are undervalued. Such large firms might be more likely to serve the metropolitan areas than the more rural ones, and so shortages of providers willing to take low reimbursements may be most likely to arise in the more rural parts of the country. But on the other hand, the cost of doing business is lower in rural areas, and so providers there may be more willing to accept Medicaid reimbursements. The bottom line could simply be that the states already in the worst budget positions will be the least able to bear the additional cost of the Medicaid expansion.

A meaningful part of that additional cost will be administrative rather than the direct cost of reimbursing providers. One administrative headache cited by the states is the sheer scale of the increase in their caseloads – perhaps 30 percent. But another is more the complexity of this particular set of rules. Under the PPACA, households with incomes below 133 percent of the federal poverty standard receive their coverage through Medicaid; those above that level go to the new health-insurance exchanges and buy their coverage (with help from federal subsidies). The complicating factor for state administration of Medicaid and the exchanges is how many people at those comparatively modest income levels – typically with well above zero private-sector income, but not large amounts – will bounce back and forth above and below the 133 percent standard. And what do the states do, and what do the households do, when eligibility changes? For the states, some people could become frequent visitors in the offices that determine Medicaid eligibility. (Perhaps a modicum of streamlining could come from co-locating and integrating the Medicaid offices and the state exchanges.) And for the people, there may be very little overlap between the providers under Medicaid and those under the private plans offered in the exchanges. For those persons, “continuity of care” could become just a dream. This issue is not totally new, because people already move on and off of Medicaid. But the numbers of people so affected certainly will rise, and their transitions no longer will be just a binary on-and-off of Medicaid, but rather a switch between two very different programs.

More basically, the states have until 2014 to have their exchanges up and running. Some states have not even started that process, in a few instances because they were challenging the law in court and expected victory. But delays are more widespread than that. It is most likely that it would take a state law (rather than just administrative action) to implement an exchange, and some state legislatures meet only every other year; for such states, the 2010 PPACA with an effective date of the beginning of 2014 left a fairly narrow needle to thread. Even many state legislatures with annual sessions often meet for only two or three months per year, affording little time for this complex task (and to react to the court decision now). If any state fails to have a working exchange in time, the federal government is directed by the law to operate the exchange; but there are press accounts that the federal government itself is behind schedule in building that infrastructure.

So there is a great deal of budgetary uncertainty for the states themselves, and their uncertainty to some degree infects (pardon the pun) the federal budget outlook. But the federal budget picture includes uncertainties all its own.

The potential elephant in the room is how many employers will continue to offer health insurance, versus how many will decide that it is preferable, at least in that it is cheaper, to terminate their plans and send their employees to the health-insurance exchanges. Large employers (50 or more employees) who do not offer insurance must pay penalties. But some analysts have argued that many employers will be able to pay the penalties, increase their employees’ cash pay, and send them to the exchange (where those with incomes under 400 percent of the poverty standard will receive public subsidies) and have both the employer and its employees come out ahead. The reason why both would come out ahead, of course, is that the amount of the penalty can be less than the amount of the federal subsidy – so the loser in this zero-sum game is the federal budget (see here). A survey has indicated that many employers are considering dropping coverage (see here). The impact on the budget is alleged to be in the hundreds of billions of dollars, with more exits by employers meaning government spending above and beyond the estimates.

There are arguments that the dire forecasts are exaggerated. The Congressional Budget Office (CBO), in its official estimates, assumed relatively little dropping of coverage by employers (see here). A key element in that calculation was that employer-paid health-insurance premiums (except to the extent that they exceed the “Cadillac” threshold) are excluded from income for tax purposes, but employee-paid premiums are taxable (except to the extent that an employee’s total health spending exceeds 7.5 percent of income – which the insurance, of course, is intended to prevent). So there is some additional tax revenue if employers drop employee coverage. Another underlying question is whether employers who drop coverage in fact will increase employees’ pay by the employers’ prior share of the cost of insurance premiums. Conspiracy theorists argue that employers would keep the difference. Economists see that as a simple pay cut, which employers could have done absent any change in insurance coverage – with multiple ill effects in terms of recruitment, retention and morale, which is why employers haven’t done it already.

CBO’s current projection is that employer coverage will decline by three to five million people, with many more than that number gaining coverage through the exchanges and Medicaid. But CBO has simulated alternative scenarios under which much larger numbers of employees lose coverage, with the assumption that employers increase cash wages by the amount of their premium savings, and found that the effect on the federal budget’s bottom line, all factors considered, is minimal. That calculation implicitly underlies their estimate that the change in employer coverage will be small. Those who agree with CBO contend that many of the employers who are now “considering” dropping coverage are in the early stages of their own analysis, and will not do so once they factor in all of the tax consequences.

What ultimately happens to both employer coverage and the budget depends also upon perceptions and behavior. How will the exchanges be perceived (once they actually begin operations), and how many and what kinds of insurance plans will participate? If the exchanges are seen as a last resort for very low-wage workers that attracts few insurance plans to participate, then more employers will choose to continue to offer coverage as a market signal that they are good places to work. On the other hand, if the exchanges are successful (note that CED proposed exchanges to cover all workers and their families, available here), employers might see dropping coverage as a rational strategy, and a trend in that direction could easily snowball. More employers might follow if they conclude that they are paying too much to administer their own plans, and that employees appreciate the greater range of choice that exchanges potentially could offer. The good news in that instance will be that the exchanges will become, as much by accident as by design, competitive marketplaces in which efficiency in the delivery of quality health care will be rewarded. The bad news could be a greater cost to the federal budget, although CBO contends that the additional cost will be limited.

There will be a great deal of fussing in the political world over the coming weeks about whether the PPACA assessment on individuals who do not purchase health insurance is or is not a “tax.” But that question is incidental from an economic standpoint; those payments are what they are, and what they are called makes no difference. There are far more important open questions that relate to the actual economic resources that the PPACA will consume, and where the burden of financing those resources will rest. The press is reporting today that the legal questions raised in the Supreme Court case, despite the issuance of the ruling, have not yet been answered; the economic questions, too, remain open.