By Joanne Kenen
If you are wondering if the year-end spending and tax bills approved by Congress undid some of the funding for the Affordable Care Act – they did. This tip sheet will give you some understanding of what happened – and the questions about what comes next.
The bipartisan deal contained four major ACA provisions – rolling back three taxes which raised money to pay for the ACA, as well as renewing for another year a limitation the Republicans put in last year limiting the risk corridor payments to insurers. The Democrats backed the tax changes, and haven’t been able to stop the risk corridor change. The tax changes are worth $35 billion (if you count some related deductibility provisions, $32 billion if you don’t.)
Here’s the breakdown:
- Risk Corridors – The risk corridors are a temporary program – modeled on a provision in the Medicare Prescription Drug program created by Republicans a decade ago – to help insurance plans weather the first rough years of the ACA. Without getting into too much budgety jargon, suffice to say the GOP blocked HHS from making the full payments (though technically the plans are still owed the money – which could end up yet another ACA court-battle in the future, as Paige Winfield Cunningham of the Washington Examiner noted). The government is paying only 12.6 cents on the dollar. That shortfall has been particularly hard for small insurers and was a big factor – although not the only factor – in the collapse of half the co-ops.
- “Cadillac” Tax – The most significant new development is the delay of the “Cadillac” tax (and once it’s delayed for two years, there’s a pretty good chance it will be delayed again…). The “Cadillac” tax – which has nothing to do with cars –is a 40 percent excise tax on high cost insurance policies that was supposed to have taken effect in 2018. It would have applied to health plans that are worth more than $10,200 for individual coverage, and $27,500 for family coverage. But it would creep up to hit more plans (and middle income people) in the coming years. Labor and business both hated it.
But the tax had two purposes. One was a ‘pay-for” for the Affordable Care Act. The other was to gradually curb overutilization of health care and help make health-related tax break more fair. But the tax caused huge political controversy. On the left, there is concern because union-negotiated plans would be hit (and it’s not a great thing for Democrats to infuriate unions in an election season). And on the right, businesses that offer generous coverage would be hit. Groups like the Chamber of Commerce fought it. The Joint Committee on Taxation (JCT) said the provision costs $16 billion over two years.
Many health economists, on both left and right, think a better tool (or as they like to say, a “more elegant” approach) would be to partly limit the tax breaks on employer sponsored health care. That was ruled out in 2009-10 because Obama had pledged not to raise middle class taxes. Could a cap be worked into some kind of broad tax deal under House Speaker Paul Ryan in the next few years – possibly 2017? That’s a definite … maybe.
- Medical Device Tax – This 2.3 percent excise tax, which already had gone into effect will now be suspended for two years. What happens after that is murky but there’s a good chance it would be repealed or delayed again. Democratic senators from states that have big medical device makers had led the charge on this one – and Republicans of course oppose ACA revenue raisers plus most taxes. The JCT put the cost at $12 billion.
- Health Insurance Tax – This 3 percent tax on device makers is already in effect (and largely being passed onto consumers) and will be suspended for one year. The JCT put the cost at $12 billion Democrats had wanted this provision to help curb premium increases at least in the short term. Of the three taxes, this is probably the most likely to eventually get restored but that’s still not real likely.
Now what?
How will the money get made up? Good question. If a Democrat gets elected president, addressing costs and financing of the ACA will be on the table. If a Republican wins, the GOP agenda is scaling back the law, not strengthening it.
The administration says it’s not a crisis – it’s a one- to two-year delay for part but not all of the financing. But given that most people in D.C. think most or all of these taxes are gone forever – the financing does change. The Committee for a Responsible Federal Budget says that would blow a $257 billion hold in the ACA budget over a decade. We’ll have to await the updated CBO projections on whether the administration can still make the claim that in the long-term the health law saves more than it costs (and we should note that the CBO has to analyze current law, and on paper at least current law says the taxes are on hiatus, not gone). Of course, Republicans have always been highly skeptical that the health law over the long term was a budget tamer, not a budget ballooner.
One other very important point – these were bipartisan votes, and the White House was not able to stop Democratic defections on this package. It represents a significant and notable change from the solid Democratic front against the onslaught of Republican (or Republican-allied) attempts to defund, repeal, dismantle and kill the health law in court. It’s definitely a turning point in the political dynamic – but what it turns to, it’s too soon to tell.
More reading
- For a deficit hawk perspective here’s a blog post from Committee for a Responsible Federal Budget. The post was written before the deal was finalized and assumed the health insurance tax would be halted for two years, not one, so the final numbers have less red ink than projected here but the basic analysis holds.
- The congressional Joint Committee on Taxation’s analysis (pdf) of the tax extender law.
- The New York Times looks at “blows” to Obama’s health law.
- Vox says it’s going to cost more.
- The Wall Street Journal looks at the path from delay to repeal.
- Politico looks at how the White House lost the Cadillac tax.
- Bloomberg says the deal will show in business’ bottom line.
- A liberal budget expert (a few months ago) looks at the medical device industry – and argues in favor of keeping the excise tax.
- The Commonwealth Fund looks at alternatives to the “Cadillac” tax.
- Glenn Kessler provides some background on how the risk corridor deal came about in 2014 in the Washington Post’s fact checker column. But in Forbes’ Avik Roy correctly points out that while Marco Rubio may not have actually negotiated the final language that became law, he was the legislator who drew attention and initially championed the issue.
