Commentary Magazine

The ObamaCare Debacle Deepens

In late June, the Supreme Court ruled that despite some significant constitutional flaws, the Obama health-care law would remain the law of the land—owing to the reported decision of Chief Justice John Roberts to change his vote and side with the court’s four liberals on the key issue of forcing every adult American who has a high-enough income to buy health insurance.

Quite simply, the Roberts opinion took a bad bill and made it worse. If ObamaCare continues to exist in the form Roberts has devised, with much of the mechanism for funding its requirements stripped out, the consequences for the country and for our health-care system may be even more disastrous than they would have been had the problematic law simply been allowed to stand as it was.

This unfortunate situation stems from the fact that the Roberts decision, although it allowed the Obama White House to claim a political victory, undermined the law in two areas critical to the law’s financing: the law’s enormous expansion of Medicaid (the program that provides health care to the very poor) and the individual mandate.

The Medicaid Disaster

The most interesting, and surprising, aspect of the decision had to do with Medicaid, whose costs are currently borne both by the federal government and the states. The court found unconstitutional the provision of the bill that would force states into broader Medicaid coverage by taking away all their federal Medicaid dollars if they refused to  go along. (It has been commonly noted that the majority’s ruling was 5-4. But when it came to invalidating a key aspect of the bill’s Medicaid expansion, the court ruled 7-2.) Conservatives may choose to be solaced by this, just as they have taken comfort in the fact that states have new grounds to resist not only the Obama Medicaid growth but also, perhaps, federally imposed Medicaid expansions in the future.

The decision thus has made state participation in ObamaCare’s expansion of Medicaid effectively voluntary. This is enormously important. The expansion was supposed to provide health coverage for 16 million of the 32 million additional people the Obama legislation is projected to cover. Using Medicaid as the means to extend coverage was problematic from the start. Many doctors already do not accept Medicaid patients because they are reimbursed for treating these patients at unacceptably low levels—about 56 percent of private payment levels, according to the Heritage Foundation’s Robert Moffit. That reduced reimbursement rate is the reason that Medicaid patients often have difficulty finding a doctor. Adding 16 million people1 to the Medicaid rolls is certain to exacerbate this problem. More doctors will either refuse to accept Medicaid patients at all and opt out completely from treating government-reimbursed patients—or, as is more likely, will engage in the ruse that they will simply not accept new Medicaid patients because they are all full up. Neither outcome will help those who believe themselves newly covered and yet cannot see a doctor.

Obama went with the Medicaid route in the first place for a very good reason. As a former Obama adviser told me, they did it because it was cheaper. Doing so meant the bill would cost the federal government less in the long run. Putting individuals in a state-run program is less expensive than paying directly for federal subsidies. As a result of this choice, the cost of the bill was initially scored at less than $1 trillion. Had Medicaid not been part of it, the cost would have soared well past that, and the bill might not have passed at all.

That helped Obama. But what about the 50 states? For most of them, Medicaid is already the largest line item on their budgets, and was so even before the Obama expansion. Medicaid consumes almost a quarter of all state spending and is one of the fastest, if not the fastest, growing item. According to the recent “Report of the State Budget Crisis Task Force,” state Medicaid spending under the Obama law will increase by 8.1 percent over the next decade, compared with 6.6 percent without the new law. As a result of these budgetary pressures, governors—and not just Republican ones—are looking at Obama’s proposed Medicaid expansion and having second, if not third, thoughts about going along with it.

Obama’s Democratic allies in Congress sought to make states less reluctant to participate in the expansion in two ways. The first was by saying the federal government would pay 100 percent of the bill for the newly covered—as compared with the 57 percent the federal government typically pays. And it would continue to provide 90 percent of the coverage in subsequent years.

While this apparently generous match is initially enticing, it is almost certainly too good to last. A number of governors, including Indiana’s Mitch Daniels—a former director of the U.S. Office of Management and Budget—have expressed entirely sound concerns that the federal government will cut the reimbursement level from 90 percent to deal with budget realities. This would leave the states holding the bag and forced into colossal spending increases.

Remember: Even if President Obama is reelected, he still won’t be president in 2017. Future presidents and future Congresses will not be beholden to the promises he made to cover the Medicaid expansion, and they will be dealing with a rapidly deteriorating federal-budget problem that will compel them to look for savings wherever they can be found. As former Congressional Budget Office head Douglas Holtz-Eakin told National Journal, “I cannot imagine the federal government picking up 90 percent in perpetuity.” He had evidence on his side—from the Obama administration itself. In 2011 Obama actually proposed reducing the federal share of Medicaid spending and increasing the burden on states, according to an analysis by the liberal Center on Budget and Policy Priorities.

Another study by that liberal center finds that even with the federal government meeting its match obligations, states will still be saddled with $73 billion in additional Medicaid costs as a result of the Obama health-care law expansion.

While the generous match rates of 100 percent and then 90 percent helped the Obama law pass through Congress—and will help many governors swallow the Medicaid expansion on the grounds that the cost will be low for them over the next couple of years—the health-care law did not count on the match rate to get states to fall in line. For this, they had the cudgel of simply withdrawing federal funding for the entire Medicaid program from states that refused to go along. Under the law as it was passed, a governor could not, for example, refuse only the federal funds linked to the expansion. Opting out of the expansion would lead to the loss of all federal funds for their Medicaid programs, an intolerable burden that would have had the effect of forcing most if not all governors to do as they were told.

But by declaring that the federal government could not withhold all Medicaid funding to non-participating states, the court’s majority is allowing governors to take a harder-edged look at the economic pros and cons of participating in Obama’s Medicaid expansion. Six have already declared that they will not participate, including the governors of Texas and Florida, the second and fourth largest states by population.2 Texas is particularly concerned about incurring additional costs because of its 25 percent uninsured rate—the highest in the nation. Indeed, the six states in question represent about one-quarter of the total expected new Medicaid recipients. At least six others say they are seriously looking at not participating, and 26 states in all were parties to the lawsuit against the Obama health law regarding the Medicaid expansion.

These figures mean that the entire Medicaid expansion stands on quicksand. According to an analysis by the Washington Post’s Sarah Kliff, if only the six governors who have already stated they will opt out do so, that will take almost 4 million new recipients away from the 16 million, putting a significant crimp in the Obama claim that the new law will cover an additional 32 million Americans. The Congressional Budget Office’s own post-Roberts score estimated six million fewer Medicaid recipients as a result of the decision, with about half of them entering the subsidized exchanges, and the rest remaining uninsured.

Although it is not yet clear how much flexibility the Roberts decision will give states in other areas with respect to Medicaid experimentation, the states now have the freedom to choose if and to what degree they want to participate in the Medicaid expansion. This freedom will upend existing estimates for how the Obama health law will operate.

One other complication stemming from this challenge to the planned Medicaid expansion is the likelihood of smaller-than-anticipated Medicaid enrollments leading to higher-than-expected enrollment in the subsidized exchanges. The exchanges are the state-by-state health-insurance-distribution networks created under the Obama law. Their operations are constrained in a variety of ways by the federal government, and they are the mechanisms by which individuals not covered by employer health plans can receive coverage and the attendant subsidies. As with the Medicaid expansion, a number of governors have refused to participate, which will require the federal government to set up federally run exchanges in their place.

Recall that the administration leaned so heavily on Medicaid rather than the exchanges because it was seen as “cheaper.” The likelihood, therefore, is that higher exchange enrollment will challenge the law’s already questionable assumptions that it will be “deficit-neutral.” As former Bush administration economic official Charles Blahous has shown, there is a provision in the law that limits the cost of exchange subsidies to one-half of 1 percent of GDP annually after 2018.

While the CBO thinks that the movement of only some previously uninsured individuals from Medicaid to the exchanges will lower the law’s costs, there is another, quite plausible, alternative. Higher exchange participation could drive the costs of the exchanges above the cap Blahous describes, which could increase costs in the range of $200-$360 billion over 10 years if just the six states that have already said they would opt out choose to do so. If these increases were to push exchange spending above the cap in the law, members of Congress would be faced with the tough choice of reducing subsidies for low-income individuals or waiving the budget provision. No congressman relishes either option.

What will result from the Medicaid ruling is a patchwork system of coverage across the country, exactly the opposite of what ObamaCare was theoretically intended to do—which was to establish a kind of national standard for health-care coverage from Ogunquit to Wasilla. There exists the real possibility that states with more generous coverage will, as is always the case with subsidies and benefits, attract new residents, who will move for those subsidies and benefits, not because they have found work or want to build new businesses.

The Mandate-as-Tax Disaster

The Medicaid expansion is only one of two main areas in which the majority’s ruling is already upending the implementation of the new law. As everyone now knows, the court ruled that it was constitutional to compel Americans to purchase health insurance. Roberts’s bizarre opinion, however, declared that the requirement could not be enforced through the means of imposing a penalty on all those who failed to obey. Rather, it was acceptable if it was a tax, and so Roberts unilaterally deemed it one.

And that is bad for the future of the health-care law. The individual mandate was essential to the Obama administration’s plan as a means of compelling enough Americans to purchase insurance that would help pay for the new law. The logic: Low-cost healthy individuals would buy high-cost insurance plans, even though it was against their own economic interest, because the federal government was forcing them to. This would thereby subsidize the cost of the high-risk individuals insurance companies would also have to cover.

The logic was always flawed. Before the Roberts decision, the CBO originally estimated that in 2019, even after full implementation of the law, 21 million people would remain uninsured, in large part because they or their employers would have decided that it was cheaper to pay their respective penalties than to buy health insurance. CBO increased that number to 27 million in March and now, in the wake of the Roberts decision, increased its estimate of uninsured Americans in 2019 to 30 million. Furthermore, a Congressional Research Service analysis estimated that compliance with the mandate would be plagued by weak IRS enforcement—because suddenly that agency would find itself with an unprecedented task it has no idea how to fulfill. There would also be rampant gaming of the system, in which individuals waited until they were sick to purchase insurance, since another aspect of the law forbids insurance companies from refusing to cover preexisting conditions.

The Roberts decision has exacerbated these problems. In determining the overall cost of the bill, the Congressional Budget Office assumed that the “mandatory” aspect of the mandate would lead law-abiding Americans to comply with the law, regardless of their financial circumstances, given that most people are not interested in being seen as lawbreakers.

Following Roberts, CBO stuck to its original estimate of the mandate’s impact.3 And yet, thanks to Roberts, a crucial change had taken place. Now, instead of the mandate, there is simply a “tax” on not purchasing insurance. And that makes all the difference. After all, you may choose not to invest in an IRA, even though there may be financial incentives to do so, and there are no legal or moral consequences for not doing so. Americans are now free to view the tax on not purchasing insurance in much the same way, as a choice to be made based on the economic advantages that choice brings to the individual in question. CBO may not have recognized this distinction, but a good number of Americans very well might.

Just as many states will go along with the federal “suggestion” to expand Medicaid, similarly most individuals will presumably go along with the new tax rule. But in both cases the numbers will be smaller than they were before the Supreme Court ruling changed the conception of the Obama health-care law in these two important ways.

Now What?

It was always a laughable argument that Obama-Care would simultaneously cover an additional 32 million uninsured individuals and “bend the cost curve down,” owing to the nature of health-care expenses and consumption in the United States. But now, with the Medicaid opt-out and the rechristening of the mandate as a tax, the once laughable argument is, quite simply, unthinkable and unsustainable.

That will not deter the Obama administration from proceeding with implementation of the health-care law, despite its high cost and inability to meet stated goals. In fact, in the weeks before the Supreme Court decision came out, Obama surrogates and allies were declaring that even if the individual mandate were struck down, thus completely crippling the financing mechanism for the Obama law, they would be proceeding full speed ahead with implementation.

That determination to plough ahead no matter what fits in with the many ways the reality of the Obama law will diverge from the propaganda. Already, the law includes a host of unpopular features, including its $1.8 trillion price tag, the 20 other taxes it imposes, and the fact that it will require costly new levels of insurance coverage by employers that will probably drive many of them to cease providing it. The Roberts decision compounds the issues facing the law. And yet there is little to no indication from the Obama administration that there will be any reconsideration in the face of these new circumstances.

This avowed blindness to policy realities has characterized the Obama approach to health policy throughout the tenure of the administration. Now, in the wake of the Roberts decision, this blindness threatens to take a bad situation and make it cataclysmic unless the law is repealed and soon.


1 There are indications that this figure may be a lowball estimate. According to Richard Foster, actuary for the Center for Medicare and Medicaid Services, the number of additional people on Medicaid as a result of the Obama health-care law could be as high as 25 million.

2 For now. Florida is steadily gaining on New York and will probably surpass it in population within two years, perhaps even before the implementation deadline for the Obama health-care law.

3 CBO did allow that the court’s decision will likely result “in an increase in the number of people who will be eligible for hardship exemptions [from the mandate], which will slightly reduce the prevalence of coverage and thus the strength of the social norm to obtain insurance.”

About the Author

Tevi Troy is a senior fellow at Hudson Institute and former deputy secretary of Health and Human Services. This essay is part of his series for Commentary about the political and legal journey of American health care.

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