Opinion: Daily Journal

Obamacare Takes Fiscal Hit

During the run-up to the federal budget sequester, President Barack Obama tipped his hand about a seemingly small matter that will actually have a big effect on his signature domestic-policy initiative, the Affordable Care Act.

Arguing against a House Republican plan to replace the across-the-board sequester with a more rational set of federal budget cuts, Obama complained that the GOP approach did not address the inclusion of Medicare in the sequester. He said he didn’t want the program cut by 2 percent.

But as Reason magazine’s Peter Suderman pointed out, one of the key sources of funding for Obamacare’s Medicaid expansion and mandated private coverage is supposed to be future cuts in Medicare. In reality, there is little reason to expect Congress and the Obama administration – or a future administration, for that matter – to cut Medicare spending as much as the Affordable Care Act stipulates. As has been true in the past, they will leave Medicare cuts on the federal government books until the time comes to implement them, at which point they will delay or rescind them.

That’s one reason why lawmakers in North Carolina and some 20 other states are wisely doubtful of federal promises to fund 100 percent of a Medicaid expansion for the first three years and no less than 90 percent of the cost in perpetuity. This is not a likely scenario. For one thing, it rests on an odd division of labor between Washington and the states – with Washington paying virtually all of the cost of Medicaid coverage for less-needy recipients while compelling states to continue to shoulder a substantial share of the cost of serving children, the disabled, and the desperately poor already on Medicaid. Will that division of labor really make sense to anyone in five or 10 years?

Second, and more to the point, Obamacare will prove to be a huge addition to federal deficits and indebtedness, not a net savings as originally promised. Even if Congress does indeed cut Medicare and achieve the other (improbable) cost savings legislated in the Affordable Care Act, the net-savings argument only applied for 10 years. As a new General Accounting Office report outlines, the long-term fiscal impact of Obamacare will be hugely negative — as much $6.2 trillion in additional federal deficits.

In any event, the president’s unwillingness to countenance just a 2 percent Medicare cut is a clear indication that accepting even his health plan’s short-term fiscal assumptions would be naïve. The only way to keep Obamacare from blowing up the federal budget faster than projected is for additional state governments to say no to Medicaid expansion, which has the effect of reducing the net cost even if you factor in the federal tax subsidies for people above 100 percent of the poverty line who will then be eligible for private plans within insurance exchanges.

I should mention a related event from last week. Facing opposition to Medicaid expansion from the newly Republican legislature in his state, Arkansas Gov. Brad Beebe, a Democrat, negotiated a deal with Obama’s HHS Secretary Kathleen Sibelius that would allow Arkansas to use its Medicaid-expansion funds from Washington to pay for private coverage in the insurance exchange. In other words, this arrangement would allow Arkansas to put hundreds of thousands of people who would otherwise have been on Medicaid into private health plans.

The prospect appears to be attractive to Arkansas Republicans. Nationally, some conservative health care analysts have also responded favorably to the idea. I also generally favor a premium-support model for reducing the ranks of the uninsured rather than straight Medicaid expansion. But there’s a problem. Because the “minimum” health insurance product in the exchange is so heavily regulated by Washington – by benefit mandates, limits on cost sharing, and community rating of premiums – it is going to be very expensive. Using Medicaid dollars to pay full freight for those plans won’t save taxpayers any money. In the short run, at least, it will cost much more.

What is needed isn’t just flexibility from the Obama administration on the use of Medicaid-expansion funds but also flexibility on products available in the health insurance exchange. Subsidizing the purchase of a lower-cost, high-deductible plan to cover major medical expenses might make sense.

I don’t see sense coming out of Washington at the moment.

Hood is president of the John Locke Foundation and a contributor to First in Freedom: Transforming Ideas into Consequences for North Carolina.