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Issue Brief


Repealing “Obamacare”: A Look Beyond the Media’s Misguided Deficit Focus
NTUF Issue Brief #164

July 30, 2012
By Demian Brady




Introduction

Last week the Congressional Budget Office (CBO) released a cost estimate for H.R. 6079, the Repeal of Obamacare Act, introduced by Representative Eric Cantor (with 162 cosponsors).[1] The bill is the House’s latest legislative attempt to undo the Patient Protection and Affordable Care Act (PPACA), which passed in 2010. A great deal of media attention has been focused on the impact that repeal would have on the deficit. See, for example, this headline, “Nonpartisan budget office says Obama’s health law still reduces deficit, fewer will be covered” or, “CBO: Health care repeal increases budget deficit.”[2] On that point, CBO concludes that, if enacted, the direct spending and tax provisions repealed through H.R. 6079 would lead to “a net increase in federal budget deficits of $109 billion over the 2013 – 2022 period.”

But CBO’s estimate makes for a misguided story angle because it de-emphasizes the burdens imposed by PPACA through its skyrocketing price tag and its array of taxes and “tax-penalties.” It also overlooks the tenuous nature of a significant portion of the spending reductions included in the health care overhaul. Moreover, that deficit impact projection excludes discretionary spending changes that could occur under repeal. NTU Foundation’s BillTally project can shed more light on the fiscal details of this legislation. According to data in the report on H.R. 6079 and additional information provided in a previous CBO analysis, repealing the health care package could reduce outlays by $926 billion over ten years, through a combination of direct spending and discretionary changes.[3]

Total Costs of PPACA

The goal of NTUF’s BillTally study is to track the net change in spending of legislation over a five-year window. Revenues, i.e. tax receipts, are excluded. By tracking the cost of legislation sponsored by Senators and Representatives, BillTally calculates each Member of Congress’s spending agenda total. This figure shows the net change in outlays that would occur if each of the bills a lawmaker supports were to become law.

NTUF’s estimate indicates that if H.R. 6079 were enacted, outlays would decrease by a net of $319.5 billion over the next five years, for an annualized savings of $63.9 billion.

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Beyond the five-year window, the data indicates that outlays would peak at $124.5 billion in 2018 and would then recede slightly to $118.5 billion in 2020 before resuming an upward trajectory. Total outlays could reach $926 billion over the ten-year period. This amount is roughly $100 billion less than the $1.2 trillion in budgetary reductions to be imposed through the Budget Control Act’s mandated reconciliation measures scheduled to kick in next year.

Direct Spending Increases

The bulk of the Affordable Care Act costs result from the net changes in direct spending. The CBO report estimated the effect of several provisions of PPACA that would impact direct spending for a net cost of $890 billion over ten years, a mix of increases minus reductions. The increases would total $1.632 trillion over the next ten years. Figure 1, below, shows the cost of the three largest direct spending provisions in the health care bill. As the trend line indicates, costs are likely to continue to rise in future decades.

Starting in 2014, PPACA mandates the creation of “health insurance exchanges” where certain individuals and families will be able to purchase coverage with a substantial federal subsidy. These costs will rise from $23 billion the first year to $123 billion by the tenth year.

The bill also includes a sweeping expansion of Medicaid that extends enrollment to all individuals under age 65 who are not eligible for Medicare and have incomes up to 133 percent of the federal poverty level. Currently there are certain additional criteria for eligibility (such as a pregnancy or a child in the household) and asset tests that must be met. These will be eliminated through PPACA.  Costs for Medicaid and the Children’s Health Insurance Program (CHIP) would subsequently see significant hikes, averaging $64.4 billion annually over the next ten years.

Risk adjustment payments would also add to spending. These payments are charged on health plans in states that have low cost enrollees. The funds are to be used to subsidize plans with high-cost enrollees. Furthermore, PPACA implements a reinsurance program over the first three years of a state’s insurance exchange. Most plans within a state must make payments to the organization that manages its health insurance exchange, and that money would be used to subsidize certain high-risk plans. Together, these payments would rise from $6 billion in 2014 to $27 billion in 2022, a ten-year outlay of $177 billion.

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Direct Spending Reductions

PPACA also included some direct spending reductions totaling $741 billion over the next ten years that would be repealed under H.R. 6079. Figure 2 shows the impact of the three largest reductions. Cuts in fee-for-service payments under Medicare result in the largest share of these reductions. As has been widely noted, Congress passed a previous law to reduce physician payments under Medicare, but has regularly taken action to prevent those reductions from ever taking place. [4] PPACA reduces the fee-for-service payments to providers without implementing reforms to control costs. It is highly likely that Congress would have to revisit these reductions, and even CBO has cast doubt on the long-term sustainability of this PPACA policy.

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Because health insurance coverage would be increased through the exchanges, Medicaid, and CHIP, PPACA would decrease the amount of federal money paid to certain hospitals with a large share of low-income and uninsured patients. Reducing these Disproportionate Share Hospital payments is projected to save $6.9 billion annually.

CBO estimates an additional $3.1 billion in savings would be foregone if the program is repealed due to the controversial Independent Payment Advisory Board (IPAB). The Board is charged with imposing cost controls on Medicare if spending exceeds certain levels. CBO acknowledges that this estimate is “extremely uncertain because it is not clear whether the mechanism for spending reductions under the IPAB authority will be triggered under current law over the next 10 years.”[5]

Discretionary Spending Increases

PPACA also included upwards of $35 billion in discretionary spending that H.R. 6079 would repeal. Since CBO’s budget deficit impact figure was based on changes in direct spending and revenue, this amount was excluded. CBO notes that implementation costs for the health care bill could run up to $20 billion over ten years for the Internal Revenue Service and HHS (the estimate projects $10 billion for each). In addition, the program included $100 billion in other discretionary spending over ten years. In its report for H.R. 2 last year, CBO noted that $85 billion of this amount was for previously existing programs that would likely have continued to receive funding even if PPACA were not enacted. This amount is excluded from NTUF’s estimates.

Cost Have Been Estimated Upward

Program costs for PPACA have increased since CBO last scored repeal legislation. Based on CBO data, NTUF determined that passage of H.R. 2 would have reduced spending by $40.3 billion annually from FY 2012 to FY 2017. The estimate has grown to $63.9 billion in savings because of the timing of the new estimate – the bill’s implementation is now one year further along and so the new estimate includes an extra year of the health insurance exchange subsidies. In addition, CBO has revised its projections for several of the components of the complicated health care package. For example, the projected cost of the health insurance subsidies has increased. Previously, CBO estimated they would cost $176 billion from FY 2013 to 2017. The new analysis hiked the estimate to $233 billion over the same time period – a significant 32 percent jump.

In determining an estimate of the savings for H.R. 2, the Repealing the Job-Killing Health Care Law Act (introduced in 2011), NTUF excluded CBO’s figures regarding the CLASS Act provision in PPACA.[6] This established a long-term care insurance program that would have started collecting premiums – scored as offsetting receipts or negative spending – in 2012 but would not have started paying benefits until 2017, outside of the five-year budget window NTUF uses to score legislation. CBO estimated the premiums would amount to $48 billion from 2012 to 2016. This sum, intended to finance a separate new entitlement program, was being used to mask the short-term costs of PPACA.

There was good reason to be skeptical of the long-term fiscal health of this program. CBO forecast that after ten years, the program would spend more on benefits than it would receive in premiums. The federal government also evidently became concerned about the program’s sustainability: in October of 2011, the Secretary of Health and Human Services (HHS) announced that she did not “see a viable path forward for CLASS implementation at this time.”[7] Because CLASS is still law it could be revived. In its present form, it is likely to add red ink to the budget’s long-term outlook. Passage of H.R. 6079 would preclude the Executive Branch from attempting to implement this program in the future.

PPACA’s Tax and Compliance Burdens

CBO’s finding that repealing PPACA would increase the deficit is due mainly to the scale of the new taxes imposed above and beyond the program’s $926 billion price tag, which as discussed in this Issue Brief, could end up being even higher. The Americans for Tax Reform identified 20 new or increased taxes.[8] CBO’s latest analysis pegs the net burden of the tax components of PPACA at $1 trillion. This includes $55 billion in “tax-penalty” payments by the uninsured under the individual mandate.

The main objective of PPACA was to expand coverage of the uninsured, a tradeoff of which could mean less net income for many Americans and businesses, as well as higher prices and fewer jobs. One of the new taxes included in PPACA is a 2.3 percent tax on medical devices that will be assessed starting in 2013. According to the IRS’s proposed regulation, the tax will apply to any medical device excluding “eyeglasses, contact lenses, hearing aids, and any other medical device determined by the Secretary to be of a type that is generally purchased by the general public at retail for individual use.”[9] CBO estimates this tax will collect $29 billion.

Taxes such as this on businesses are typically passed on to the consumer through higher prices. The American Hospital Association is rightly concerned that this tax will increase overhead costs for hospitals and physician groups.[10] A bill to repeal this tax passed the House but lays dormant in the Senate.[11] Supporters of maintaining the tax argue that the manufacturers of medical devices should have no fear, given that the expansion of coverage through PPACA will in turn expand their market base. Such a claim might strike many taxpayers as being a case of wishful thinking, or: big government giveth, but only if it can taketh away first.

Compliance burdens are also a major issue to businesses, leading to concerns that they will either stop offering health care insurance as a benefit or pass along the costs through higher prices. Last week the fast-food chain McDonald’s, with employees at up to 14,000 locations around the nation, announced that its PPACA compliance costs will total $420 million per year.[12] Businesses all across the country are also considering how to cope with their own situations. There are three likely outcomes: more expensive products, reductions in hiring, or many businesses may stop offering insurance altogether, exposing more Americans to the individual mandate penalty, and further driving up coverage costs under PPACA.

Challenges in Estimating the Impact of PPACA

PPACA is an immense and incredibly complicated program with lots of shifting parts and a timetable permitting rollout over several years before its full implementation. Dozens of government agencies are still drafting its regulations, and as the surprising Supreme Court ruling showed, there is a lot left to learn about how this bill will function as it becomes law.

Cost estimates have already been revised upward while the program is still being unveiled, and it would be surprising if outlay projections were not further increased the next time a full analysis is conducted. Large-scale government programs, especially entitlement programs, typically cost more than their original estimates.[13] This is likely to happen again with PPACA given the tenuous nature of its most significant outlay offset – the squeezing of Medicare’s fee-for-service payments in the absence of reforms to make them stick. Additionally, legislation has been introduced in Congress to expand spending under PPACA and to also block or delay some of its spending reductions.[14]

The largest potential source of spending increases, and an ironic side-effect of PPACA, could result from its compliance costs forcing employers to discontinue offering health care benefits, pushing more people into PPACA’s net, further driving up subsidy costs. Despite the pledge that individuals would be able to keep the insurance they had before passage of the overhaul, an unintended consequence of the effort to expand coverage is that many may end up losing theirs.

The most heated contest is for the gavel of the Energy and Commerce Committee. Current Ranking Member Joe Barton (TX) would also need a waiver from Republican Party leaders to head the Committee in the next Congress. His net agenda would see the budget reduced by nearly $17 billion while his chief rival for the spot, Fred Upton (MI), is backing legislation to increase the budget by over $24 billion.

The soon-to-be-former Chairman of the Financial Services Committee, Barney Frank (MA), has the largest net agenda among the outgoing leaders. The legislation he has supported through the three-fourths of the 111th Congress would send spending upward by almost $1.5 trillion. Two net cutters are competing for control of this gavel: Ranking Member Spencer Bachus (AL, with a net agenda to cut just over $107 billion), and his challenger Edward Royce (CA, who would slice nearly $79 billion from outlays).

The recent legislative agendas of the potential new Chairs indicate that in the radically altered political landscape of the 112th Congress, the Republican-controlled House will take expenditures in yet another “new direction.” But in order to get the budget “back in black,” the leaders of the House will have to stay true to the small government principles of the Tea Party wave that helped propel them into power. They will also have to find areas of agreement with the Senate and the President. Whatever else happens in Washington next year, there will be a hard-fought struggle between those who believe that Washington has a spending problem and those who believe Washington has a revenue problem.


About the Author

Demian S. Brady is the Senior Policy Analyst for National Taxpayers Union Foundation (NTUF), the research and educational affiliate of the National Taxpayers Union.


Notes


[1] Congressional Budget Office, “Letter to the Honorable John Boehner providing an estimate for H.R. 6079, the Repeal of Obamacare Act,” July 24, 2012.

http://www.cbo.gov/sites/default/files/cbofiles/attachments/43471-hr6079.pdf

[2] Laurie Kellman, “Nonpartisan budget office says Obama’s health law still reduces deficit, fewer will be covered,” Washington Post, July 24, 2012.

http://www.washingtonpost.com/politics/nonpartisan-budget-office-says-obamas-health-law-still-reduces-deficit-fewer-will-be-covered/2012/07/24/gJQAHMj26W_story.html

David Jackson, “CBO: Health care repeal increases budget deficit,” USA Today,  July 24, 2012.

http://content.usatoday.com/communities/theoval/post/2012/07/cbo-health-care-repeal-increases-budget-deficit/1?csp=34news#.UBaH6WGXubM

[3] Congressional Budget Office, “H.R. 2, Repealing the Job-Killing Health Care Law Act: Cost Estimate for the Act as Passed by the House of Representatives on January 19, 2011,” February 18, 2011. http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/120xx/doc12069/hr2.pdf

[4] Reiham Salam, “Does PPACA Cut Medicare FFS or Not?”, NationalReview.com, October 22, 2010. http://www.nationalreview.com/agenda/250753/does-ppaca-cut-medicare-ffs-spending-or-not-reihan-salam

[5] Congressional Budget Office, “Cost Estimate: H.R. 452, Medicare Decisions Accountability Act of 2011,” march 7, 2012. http://www.cbo.gov/sites/default/files/cbofiles/attachments/hr452_2012.pdf

[7] Secretary Kathleen G. Sibelius, “Secretary Sebelius’ Letter to Congress about CLASS,” October 14, 2011. http://www.hhs.gov/secretary/letter10142011.html

[8] Americans for Tax Reform, “Full List of Obamacare Tax Hikes: Listed by Size of Tax Hike,” June 29, 2012. http://atr.org/full-list-obamacare-tax-hikes-listed-a7010

[10] Bob Spoerl, “Medical Device Industry Concerned About PPACA Consequences,” Beckers Hospital Review, June 29, 2012. http://www.beckershospitalreview.com/news-analysis/medical-device-industry-concerned-about-ppaca-consequences.html

[12]Jen Wieczner, “Will Obamacare Raise the Price of a Big Mac?” Smart Money, July 26, 2012.  http://blogs.smartmoney.com/advice/2012/07/26/will-obamacare-raise-the-price-of-a-big-mac/?grcc=grdt

[13] Chris Edwards, “Government Schemes Cost More Than Promised,” Tax & Budget Bulletin, CATO Institute, September 2003.  http://www.cato.org/pubs/tbb/tbb-0309-17.pdf

[14] National Taxpayers Union Foundation, Taxpayer’s Tab, June 27, 2012.

http://www.ntu.org/ntuf/taxpayerstab/3-15.html