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A Primer on the ACA, II: Follow the Money

Posted by John McDonough  November 20, 2011 07:45 PM

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"If you want to truly understand something, try to change it." So said Kurt Lewin, a pioneer of organizational psychology. Makes sense to me, and helps explain why the change agents among us often have the best sense of what's really going on.  And if you want to truly understand a law, you need to follow the money. This is especially true when it comes to the Affordable Care Act/ObamaCare.

In understanding the ACA's financing, I find it most helpful to understand the money flows organized by the titles of the law. This helps in understanding not just the separate titles, but also how they relate to each other and fit together organically. For this post to make sense, I suggest that you read my first Primer post describing each of the titles. So if this is of interest to you, fasten your seat belt and let's take a ride on the money train.

Below is a table I find fascinating.  I formulated it for my book, Inside National Health Reform, using data from the final ACA cost estimate published on March 20, 2010 by the Congressional Budget Office, Congress’ non-partisan budget analyst.  CBO estimates are normally done using a ten-year budget window:

ACA Money.png

The first column on the left lists the nine titles (provisions in ACA Title 10 and in the Health Care and Education Reconciliation Act [HCERA] are folded into the estimates for each title). 

The second column projects the numbers of currently uninsured Americans who will get covered by 2019 by each ACA title.  So CBO projects that by 2019, 16 million uninsured will get covered through the private health insurance expansions in Title 1 and 16 million via the Medicaid expansions in Title 2.  All these estimates are subject to significant variation, not because CBO estimators are dumb or lazy (in my experience, they are highly skilled, dedicated, and professional), but because the nature of this work is subject to high uncertainty.


The third column shows where the money is to be spent, by title, and the fourth shows where the money is raised or saved to finance the costs in column three.  So here is the big picture:  nearly 90% of the ACA’s funding is spent through Titles 1 and 2 to cover 32 million uninsured Americans.  And nearly 75% of the money to finance these expansions is done through new savings and taxes in Titles 3 and 9, the Medicare changes and the revenue increases respectively.   


Subtract the $1,075.6B expenses in column 3 from the $1,198.8 in revenues in column 4 and you get  $123.2 billion in deficit reduction over the ten-year window.  (The HCERA includes $16B in education savings, for $139B in total deficit reduction, but here we’ll just focus on the health numbers.)  This explains the claim of ACA supporters that the law, despite its high costs, also will reduce the federal debt. 


Contrast this result, importantly, with the Medicare Modernization Act (MMA) passed in 2003 by the Republican-controlled Senate and House and President George W. Bush.  That law, which created the Medicare “Part D” prescription drug benefit, is financed about 25% through enrollee premiums and about 75% from General Revenues.  Comparing two health laws in the same budget time window, 2010-19, shows that the ACA is projected to reduce the federal debt by $139B and the MMA is projected to increase the federal debt by about one trillion dollars.  Quel difference! 


Let’s examine the two most controversial boxes, first and foremost, $449.9 Medicare savings in Title 3.  About 74% come from three changes: lowered payment increases to hospitals ($156.6B); changes to payments to Medicare Advantage (MA) plans ($135.6B); and lower payment increases to home health agencies ($39.7B).  In negotiations in 2009, hospitals and home health agencies agreed to the changes and supported the ACA’s passage; insurance companies who participate in Medicare Advantage were willing to support $80B in reductions, though Senate negotiators demanded more and got them over fierce industry objections – 18 months into the ACA, the MA plans are doing well under the new arrangements. 


These reductions were politically volatile.  During the 2010 Congressional elections, Republican candidates won a record number of senior citizen votes by lambasting the Democrats’ “half trillion” cuts to Medicare.  Tellingly, Cong. Paul Ryan’s budget plan, which includes a controversial reconstruction of Medicare and was supported by nearly every Republican in the House and Senate (not Sen. Scott Brown, R-MA), includes repeal of the entire ACA with one notable exception, $449.9B in Medicare reductions. 


This salient detail got almost zero attention, but it’s true.  And if Republicans control the White House, Senate, and House after the 2012 elections, they will attempt to repeal the ACA asap through a “budget reconciliation” vehicle which only requires 51 votes for Senate passage and cannot be filibustered; and they will likely achieve deficit reduction by repealing nearly all of the ACA except for the $449.9B in Medicare reductions.


The second most controversial category is the $437.8B in new revenues in Title 9.  Though there are many provisions, as usual, there are a vital few accounting for nearly 90% of the total.  First, the Medicare hospital insurance tax will be increased and the base broadened for high-income earners – families making $250K+ and individuals making $200K+: (210.2B).  Second, new fees are imposed on health insurers ($60.1B), drug companies ($27B), and medical device makers ($20B).  Third, new costs or requirements are imposed on certain health insurance arrangements: very high premium (“Cadillac”) plans ($32B), medical expense deductions ($15.2B), flexible spending arrangements ($13B), and health savings accounts ($5B). 

Many of these provisions are under assault now, especially the taxes on insurance and medical device companies.  In truth, it is nearly impossible to find revenue increases and savings which do not generate opposition.  I am reminded of George Washington's farewell address in 1796: "No taxes can be devised which are not more or less inconvenient and unpleasant."  It's still true today.

One item of recent note involves Title 8's CLASS Act initiative, the voluntary disability payment program which the Obama Administration announced last month it would not implement.  Because CLASS would have required enrollees to pay premiums for at least five years before qualifying for any benefits, CBO estimated the program, if launched, would generate $70.2B in revenues in the 2010-2019 budget window and only negligible expenditures.  Thus, with CLASS on ice, just about half of the ACA’s $140B in deficit reduction is out the window with the Obama decision to cut CLASS.  Right?


Not quite.


This is because the ACA financing process is dynamic and always in motion.  On March 30 of this year, CBO released an updated analysis of the ACA and, as appropriate, moved the budget window forward from 2010-2019 to 2012-2021.  Because the major ACA reforms don’t take effect until 2014, the first window includes four years of minor budget activity, while the second newer window has only two low active years.  As a result, the ACA's overall budget savings calculated in the second budget window are estimated by CBO to be $210 in budget deficit reductions.  Deleting CLASS reduces those savings to roughly the $140B estimated at the time of the ACA’s passage in March 2010.

So much more to discuss, and we'll get to much of it over time.  I hope this start is helpful. 

This blog is not written or edited by or the Boston Globe.
The author is solely responsible for the content.

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About the author

John E. McDonough is a professor of practice at the Harvard School of Public Health. He is the author of the book “Inside National Health Reform”, published in 2011 by More »


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